Category Archives: Finance

If I were president of Nigeria

You may have read in the news that Nigeria is going through an economic crisis. I feel most news agencies haven’t done a lot of due diligence, they have poured plenty of ink over the human interest stories of people unable to buy petrol, of the mass protests, and of the government’s response. But they haven’t done anything to explain the economic underpinnings of the crisis.

At best they may have given you a few basic facts. The president cut fuel subsidies and currency controls; the price of everything skyrocketed; the president says some pain is necessary. But they aren’t doing anything more than blaming the president’s actions for the crisis while also blandly repeating his assertions of “no pain, no gain.”

WHY did the president do what he did? Why does he think it’s necessary? What has it achieved? What has it *not* achieved? And what could he be doing differently?

Nigerian President Tinubu came into power only last year, amid an already languid economy. He comes from the same party as his predecessor, but was not content to be “Continuity Buhari,” he wanted to shake things up. At his inauguration, he announced the end of the fuel subsidy “with immediate effect.” People of course rushed out to buy the last of the subsidized fuel before prices skyrocketed. Not long after, he began loosening currency controls. The central bank had been artificially inflating the value of the Naira, and so without these controls it’s value came crashing down.

But I don’t think Tinubu did this because he hates poor people and doesn’t want to spend money on them. I think there were dire financial circumstances that demanded these actions, but not only do they demand *more* actions that Tinubu seems unwilling to entertain, but he himself has not been a great spokesman for why he did this.

To start with, the fuel subsidy was costing Nigeria an incredible amount each day. Nigeria maintains a relatively low tax environment thanks to a state monopoly on oil which is the government’s main source of revenue. The fuel subsidy hoovered up between 15 and 25 percent of this government revenue, a huge outflow that badly constrained government finances while also inhibiting a transition to renewable, perhaps even cheaper energy like wind and solar.

Meanwhile, the currency controls also costed Nigeria greatly. There are two ways to maintain an artificially powerful currency: buying currency on the local market and restricting the movement of currency into and out of the country.

The Nigerian central bank spent loads of dollars and euros from its vault buying up naira (Nigeria’s currency) on the global market, to raise the price of naira relative to these other currencies. But this was never enough to keep the value of the naira up, the central bank’s “official” exchange rate was always around 100 to 1000 times more expensive than what the naira was *actually* worth. The black market exchange rate pegged the naira as being worth way way less than what the central bank said.

In normal circumstances, this black market rate would quickly take over, obliterating the value of the naira as people trade naira for dollars at fair market prices, rather than the bank’s artificially set price. So currency controls were implemented to prevent this.

There were (and still somewhat are) huge restrictions on bringing dollars or foreign currency into Nigeria. It’s hard to bring cash on an airplane, and if you send money digitally through a bank, the Nigerian central bank will forcibly convert your dollars into naira at their set price, turning your 100 dollars into say 10,000 naira instead of the 1,000,000 naira they’re actually worth. This loses you a lot of money. And then there are crackdowns on any unofficial money changers, all this means that it’s very restrictive to move money into and out of the country.

But what if you’re a tourist, or a business that wants to invest in Nigeria? Then the central bank’s currency scheme is a certain way to fleece you for your dollars. Nigeria (like most countries) demands all transactions be in its local currency, the naira. So if you want to buy Nigerian yams, either because you’re a tourist who wants to eat yams or because you’re an exporter wanting to export them on the global market, you need to change your dollars into naira to do so. This either means losing 90% of your dollar’s value through the official exchange rate, or risking jail time by smuggling dollars into the country and using a black market money changer.

Either way, this makes investment *and* tourism a lot more precarious, and does even more to scare foreign money *out* of the country, at a time when Nigeria desperately needs money coming *in* to save its beleaguered industries.

To get back to Tinubu, he saw that Nigeria’s government finances were not good. The government deficit ran 5% of GDP, and was growing. It was difficult, and VERY expensive for Nigeria to borrow money on the world market because of this, so continuing the deficit-spending path was merely robbing future generations to pay for the present generation.

So he wanted to cut spending and boost investment. He cut the fuel subsidy, since it costed so much of the government’s revenue, and he loosened currency controls so that it’s easier to invest in Nigeria. In this way he hope to grow the economy and raise tax revenue. In the long run, this should provide *more* money to support the people.

Loosening currency controls however, led to triple digit inflation, as the naira’s official value finally caught up to its black market value. And combined with the end of the fuel subsidy this made everyone a lot poorer and made food and basic necessities a lot more expensive.

There’s a glimmer of hope that Tinubu’s plans are working, foreign investment is surging and perhaps after so much pain, Nigeria can come out the other side with a stronger economy that can actually spend more on its people, more on education, safety, and medical welfare instead of just subsidizing petrol. But it may also be far to little to save Tinubu’s presidency, and his successor can just undo it all to appease the populace.

I think the gains would come a lot faster for Tinubu if he were willing to be a truly radical reformer, and not just cut spending on the poor.

In addition to the fuel subsidy and currency restrictions which make investing in Nigeria difficult, the country also has a highly restrictive trade policy which isn’t making things any easier. Nigeria prohibits the import of a wide variety of products, from staple crops like cassava (related to the yam or sweet potato) to cement to eggs and meat. The only justification for this is to “protect domestic industry and farmers,” but let me rebut that:

First of all, people cannot afford food! The end of the fuel subsidy, the floating of the currency, these have put the price of food out of reach of many Nigerians. There are thousands of foreign companies, in West Africa and the rest of the world who can step in to provide more food if import restrictions are lifted. More food means a drop in the cost of food, through the laws of supply and demand, and so this increase in supply would go at least some way towards alleviating the hardships brought on by Tinubu’s other reforms.

And furthermore, importing food would create just as many jobs, if not more, than it “destroyed.” Markets need workers to staff them, trucks need drivers, loaders, unloaders and ports need all the same. Importing eggs so that people can afford to eat might make it harder to a poultry farmer to compete, but it would also create a number of jobs in logistics, supply, and customer-facing roles to get those eggs into people’s hands.

Furthermore, the unemployed farmer need not remain so. The high price of eggs makes it hard not only for customers to afford eggs, but also for any industry that uses eggs to afford them. Ice cream is very popular in Nigeria, but locally made ice cream is more expensive than it should be because the price of eggs remains high. But importing eggs would lower the price of eggs by driving up supply, and would allow ice cream manufacturers to buy more eggs, make more ice cream, and thus they’d need to hire more loaders and unloaders, more line workers, more mechanics for their ice cream machines, and so on. The loss of jobs in the poultry industry would easily be replaced by the gain of jobs in every manufacturing industry which uses eggs as an input.

And new industries could also be created. The thing about the government controlling the economy (as it does when it restricts the import and export of goods) is that the government doesn’t know as well as the market what a country’s competitive advantage is. And by stifling the import of so many goods, the Nigerian government makes it difficult for the economy to *find* those competitive advantages.

The USA eats far more pineapples than it produces, but imported pineapples are often packaged and canned in the USA, and that packaging and canning industry employs far more people than pineapple-growing alone ever could. And it’s not as if the USA *couldn’t* grow pineapples. California, and Florida all grow pineapples, but they have found competitive advantages in other products (like oranges or computer software) and the pineapple-growing jobs are instead pineapple-canning jobs, which are higher paid as well.

So if Nigeria ended its import restrictions, not only would individuals be able to afford groceries, but industries would be created and expanded, growing the economy. Nigeria would be able to find its competitive advantages, the things it does better than every country on earth, and would better exploit those advantages for growth and profit.

I will throw a bone to the populists who say that the fuel subsidies and currency controls may have been lifted *too fast*. I haven’t looked into it, but perhaps the pain would have been minimized, and the disruptions smoothed out, if these reforms were phased in such a way that the economy could better adjust. But if I were advising president Tinubu, my primary advice would be that he isn’t going far enough. End the trade restrictions, help the people afford basic goods, and help the industries grow through competitive advantage. The end result will be a much better economy than when you cut all the subsidies but still try to “protect” entrenched industries.

Why is State Farm leaving California?

note: I had intended to publish this months ago. But I never finished it, and now I’m struggling to get a post out in time, so I’ve tried to make this one acceptable.

There was recently news that State Farm insurance is leaving California, and will no longer accept new customers. Perhaps they may even kick old customers off their plans and refuse to do any business in California at all. This caused a wave of reactions, from consternation that a company could be so mean to California, to demands that State Farm “reimburse” customers who have paid for years with no claims, to calls to nationalize the insurance companies because “clearly” they’re just stealing from the little guy.

All these reactions will be addressed in turn, but first, let’s talk about how insurance works. If you recall my post from way back about Ric Flair and his gym, insurance is just a way to reduce your downside risk in exchange for a small lose of your upside gain. You pay a little every month and in exchange if your house or business is destroyed, you get some money back.

What’s important is that insurance is structured like a bet: the insurance company is betting that nothing bad will happen to your property during the period of your insurance, if they win the bet they keep your money and you get nothing in return (except maybe peace of mind). While they only pay out if they lose the bet and your property *is* damaged. Because of this, many people see insurance as a scam. Why would I ever pay if I don’t expect my property to be damaged? Well you’re mitigating risk, maybe there’s only a 1% chance your home is destroyed, but that’s a 1% chance that you lose *everything* and are left utterly homeless unless you have insurance to cover the cost of rebuilding your home. Isn’t it worth it to pay a little to ensure you aren’t homeless from an act of God?

Now first, I want to quickly call out a very dumb line of reasoning I’ve seen floating around regarding insurance. I’m not quoting any one tweet or post, but synthesizing what I’ve seen in many places at many times:

Why isn’t there a refund check for insurance like taxes? I’ve paid so much without using the policy, and even if I make a claim, they find ways to avoid paying. Total scam!

This sentiment belies a complete failure to understand insurance on even the most *basic* level. To start with, if you want a refund because you’ve paid in without using the policy, should the insurance company be able to demand more money if you paid in and then *did* use the policy? Of course not, you’d call them insane and selfish. But realize that it’s the identical situation, in reverse.

An insurance policy is simple: you pay regularly and they pay if certain conditions are met. Of course “certain conditions” can be interpreted differently by different people. And insurance companies are profit-maximizing (like all companies) they’ll try to avoid paying when they can. But this is a necessary evil, better the company try to limit payouts than it go bankrupt overpaying it’s customers. Because then every *other* customer would suddenly lose their insurance.

So finally, why is State Farm leaving California? Because they can’t make a profit. Most states regulate insurance incredibly heavily, to the extent that they put price caps on insurance premiums. That way the company cannot raise prices without the state’s say so. And if the state won’t let a company raise prices to cover rising costs (and costs ARE rising because of inflation and climate change), then the insurance company is not obligated to subsidize a state with coverage cheaper than costs.

As is so common, people blame the free market for a government-run system.

Vibes and the economy

I don’t want to get too political, but it’s an election year (in several countries) and The Discourse is inevitable. But I want to quickly push back on something I’ve seen all too often on social media recently.

In America, the numbers for the economy look “good.” Unemployment is low, *really* low. Inflation is high, but wage growth is higher. And the stock market is up. So why are Americans’ perceptions of the economy so poor? Why is consumer confidence lower than it *should* be?

Some partisans and twitterati have decided that Trump Was Right and the problem is fake news. Legacy media and social media are both driving relentlessly negative press and this is brainwashing people into believing that the “good” economy is “bad.”

But instead I’d like to take take a step back and see if polls are telling us something that “the numbers” just aren’t. And I think I have good evidence that they are.

First, here’s a graph from the Federal Reserve Bank of Dallas. It shows that housing affordability is lower than at any time since the 80, lower even than during the housing bubble that precipitated the Great Recession. If you’re a millennial or a zoomer, *never in your life has housing been less affordable than it is today*.

And housing isn’t just a “nice-to-have,” it sits at the bottom of Mazlo’s Hierarchy of Needs for a reason. A stable housing situation is (for most people) a necessary ingredient before they feel confident starting a family, putting down roots, or just feeling like they “belong” to where they live.

Now, you *can* have a stable housing situation in an apartment, but it’s much harder. Rent increases can drive you out, and rent-controlled apartments are hard to come by. Apartments also aren’t always conducive to the types of living that people want in their life.

So the price of housing is driving a *real crisis* in millennial and zoomer living, as people with otherwise high earnings are unable to obtain what lower-earnings folks could get in the past, namely a house to live in.

Then there’s the fact that datapoints about “all” millennials are missing key differences *between* millennials. See the next graph

The *median* millennial is doing worse than the median boomer was at this point in their life, in terms of net wealth, net assets, and housing. But the top 10% of millennials are doing way better than the boomers ever could, so taken together it seems like millennials are doing well overall. It’s like looking at a city where 1 person is a billionaire and 99 are destitute and saying that overall the city is very wealthy.

These kinds of mean/median differences are well-known to people in liberal circles, because they signal high inequality. But because a liberal is currently president, these differences are ignored by much of the twitterati.

I could say more about this topic, and I wish I had the energy to, but I’ve been so tired lately with my new medicine. Nevertheless, next time you see someone like Will Stancil screech that the kids are all morons and that everyone is rich, note that he is a member of that top 10%, not the median.

When people’s answers in polling are different than what “the fundamentals” suggest, it may be that the people are just stupid. But it’s far more likely that polling is capturing something that your data is ignoring. And right now that’s housing costs and growing inequality.

Are analysts’ opinions anti-correlated with the market?

This time 2 years ago, we were still riding high on the post-pandemic surge, and analysts were expecting the S&P could break 5,000. This time last year, we were still in what felt like the 2022 doldrums and analysts were predicting a recession. This time 3 months ago, people were declaring inflation was whipped. And then a few days ago, CPI and PPI came in hot.

I’ve written before about how the Efficient Market Hypothesis may imply that there is *no* correlation between analyst opinion and the stock market. Analysts are just as likely to be wrong as right, but people only remember the examples which agree with their biases. On the other hand, I read an article recently (I’m sorry I cannot find it to link) arguing that analyst opinion is in fact *anti*-correlated. That is, the Short Cramer ETF is correct, and analysts are so stupid you should do the opposite of what they say.

Speaking of, the Short Cramer ETF “SJIM” is down about 20% from when it began. But no matter, should you do the opposite of what analysts say or is that as irrational as following their advice?

One argument is that analysts are inherently *backward-looking*, they generally assume trends will continue forever. Some are perma-bulls or perma-bears, but on average when the market is down analysts predict a down year, and when it’s up they predict an up year. In this case, if the market is a random walk then it’s very unlikely to simply continue it’s current trend, thus an analyst is more likely to be wrong than right.

On the other hand, shouldn’t wisdom of the crowds have an affect? On the aggregate, many gamblers who bet on real world events (either sports of politics) are betting on what they *want* to happen, and many have no real knowledge whatsoever. Yet Nate Silver and others have argued that betting markets are often more accurate than not, whether it’s politics, sports or what have you. Some how, a million idiots adds up to something better than our smartest mind.

If that’s the case why don’t all the analysts of the market add up to something smart?

It just reminds me to be humble, because all too often I’ve seen people caught out badly by a trend. The late 2023 “inflation is beaten, start thanking Joe Biden” narrative won’t seem as smart if inflation stays persistently hot, any more than the “recession around the corner” narrative of 2023. Overconfidence when you really know nothing is the hallmark of an analyst, and maybe that’s why they’re so often wrong.

Is it culture? Or is it incentives?

The Internet in general is US-centric. So even on the European parts of the Internet it’s common for countries (or the entire continent) to compare themselves to America. There are thousands of things you could compare, but the most contentious is probably the economic comparisons. America has recently grown much more strongly than Europe, and it doesn’t take an economist to realize that nearly all of the world’s top companies and startups are located in America. San Fransisco alone has more billion-dollar startups than entire countries, and before you say “that’s just silicon valley,” New York and Boston aren’t far behind.

There are a million ways to explain this discrepancy and plenty of reasons why Europeans may even think it’s good. We could talk all day about whether worker’s rights are fundamentally incompatible with cut-throat capitalism, and if Europe has therefore chosen the better path. But the most flawed reason I see bandied about is that Europe just has the wrong culture for this kind of stuff.

Europe is more laid back, less aggressive. Their investors prefer same, consistent gains. The European mindset isn’t focused on innovation, and culturally Europeans aren’t focused on business the way Americans are.

I think these explanations are wrong and dumb, and I’d use more expletive words if I hadn’t made a New Year’s Resolution not to do so in my writing. I don’t think Europeans are culturally less attuned to startups and Big Business, I think the legal framework prevents it.

Not long ago, Europe was seen as the beating heart of innovation and technology. Industrial progress, scientific progress, just go to any chemistry or physics class and see how many formulas are named for Germans. But now America dominates the industries, and I think it’s because of government, not culture.

The American business framework provides significant bankruptcy protection. People mocked Trump for his many bankruptcies, but most investors know that 90% of good ideas fail and the last 10% have to cover those loses. Bankruptcy is a way for investors to mitigate their downside, and thus allows for bigger risks to be taken.

The American financial system also gives significant benefits to investors, giving them greater flexibility in buying and selling their company to whomever they wish. Until Biden and Trump brought protectionism back to the fore, it was not uncommon to see American companies sold to foreign investors with little fanfare. Nativists and racists may complain about *gasp* Chinese people owning an American company, but from the investor’s perspective selling the company is a good way to cash out his winnings from the investment. Foreign buyers compete with American buyers, and this increase in demand means prices go up. This means the sale price of companies goes up, and that increases the returns on an investor’s investment.

But long before Trump, Europe was made famous in the tech world for blocking foreign buyers from its companies. Again, nativists wrongly think that this strengthens the European tech industry by “keeping it in European hands.” But when an investor sells out, they get cash in return. What do you think they do with that cash? They don’t hoard it like Smaug the Dragon, they reinvest it. Because they’re investors. By blocking foreign buyers, you reduce buying pressure, you reduce how much money investors can get out of their investment, and you therefore reduce their upside potential. Is it any wonder then they’d prefer a safer investment, when Europe is happy to cap the gains on any risky tech investment they make?

And Europe prides itself on fining big tech companies for any reason whatsoever. But surely it’s obvious that a government hostile to profitable tech companies would scare off anyone wanting to make a profitable tech company near them. Better to start in America or get out of Europe ASAP. Microsoft and Apple can afford billion dollar fines, but such sanctions could be lethal to a smaller European tech company. So again investors are scared off, entrepreneurs are scared off, and Europe wonders why it doesn’t have a tech sector.

“But what about ASML and Spotify!” And what about them? For every single, solitary European company that manages to rise above the hostile governing environment, there are 10 American companies that rose under easier circumstances. Spotify started in 2006, and since then Massachusetts alone has started Draft Kings, Moderna and Intellia Therapeutics, all of comparable value to Spotify. And Massachusetts has half the population of Sweden.

People respond to incentives, and the incentives for risky tech investment are very poor in Europe. Bankruptcy is easier in America, returns are (or were before Biden and Trump) less likely to be capped by protectionist policies, and (before Biden) the government generally has taken a more lax approach to dealing with corporations. You can debate if these things are good or bad, but I find them far more likely reasons for America’s tech dominance than “culture” or “attitude.”

Nationalization

Nationalization (or rather Nationalisation) was a big part of Jeremy Corbyn’s manifesto during the 2017 and 2019 General Elections. If Labour won, it promised that anything and everything would be nationalized, usually at below market price.

I’ve always been skeptical of claims that nationalization leads to any kind of savings. The claim is that since a Government company doesn’t have to worry about profits for shareholders, it can be more efficient than a private company. All the profits that are paid out as dividends are instead re-invested into the company to provide better service at a lower cost.

But there truly isn’t any law saying a company ever has to provide dividends and profits. If Corbyn, McDonnell and co truly thought that companies could run better and more efficiently without profit, they could always just do that themselves without need of the government. Private citizens can always set up a non-profit corporation, they can take money from people (God know’s Corbyn was a fundraising machine) and set up a company that doesn’t pay dividends to shareholders, but instead re-invests everything to provide better service at a lower cost.

If such a non-profit did truly provide better service at a lower cost, then customers would flock to it over the for-profit companies that already exist. And again since this non-profit doesn’t hand out dividends, then Corbyn Co could easily be the fastest growing company in the world as it takes on more and more customers and reinvests into being better and better.

So why did they need nationalization? Why couldn’t they give the British people good services as a low price by just setting up a non-profit company and out-competing the for-profit ones? Why do socialists only ever think they can succeed by taking from someone else?

I think they simply didn’t have enough economic literacy to realize how their whole idea was such a shambles. Non-profit companies haven’t taken over the world because for-profit companies are actually way more efficient. They’re more efficient than non-profits and more efficient than Government companies, but socialists prefer to deny the lessons of history and keep acting like it’s the 1970s.

Not only are nationalized companies less efficient, but the act of nationalization creates inefficiencies. The idea that the government can force a sale of a profitable enterprise creates a chilling effect as investors become less likely to invest knowing it can all be taken from them at any moment. People don’t want to be forced to sell to the government, even at a “fair” price. Most eminent domain projects throughout history were done at a “fair” price, with people being paid the market value for their homes and then kicked out to make way for freeways and whatnot. But “fair” price or not, no one likes a forced sale.

And Corbyn Co wanted to take things a step further by paying below market value for the companies they wanted to nationalize. So not only was the government forcing a sale, but they were also committing theft at the same time.

I write all this because nationalization became a big word again during the recent bout of inflation, and I’ve seen way to many people jump on the bandwagon saying we need to nationalize energy companies, housing companies, and everything else to keep prices down. But prices don’t rise because companies are greedy, they rise because of fundamental shortages and inefficiencies. A nationalized company would have just as much trouble with inflation as a for-profit one, only a nationalized company could push its losses onto the taxpayers rather than be forced to raise prices and cut costs.

High prices are a signal that there is a shortage and that alternative avenues should be sought. When the price of gas rose, I decided I couldn’t justify driving to work every day so I tried to bike whenever possible. But would a nationalized American Gas company instead pass that cost onto the taxpayer? Wouldn’t they keep prices low so that I kept using as much gas as I always did? In that case every taxpayer who tries to be a good world citizen and use less carbon would be subsidizing me personally as a drove a distance that I could easily bike instead.

As inflation tapers off, it seems clear that nationalization was not the answer, and we are entering the Era of Corporate Generosity. But I doubt we’ve silenced forever the calls of nationalization, no matter how many times it leads to omnishambles. Still, I hope no serious nationalization proposal is put forward for a long time yet.

“The Crime of ’73”

Boy, these posts aren’t quite coming out weekly now are they?

I might have posted on this topic before, but I wanted to write something down and this was on my mind. It’s interesting how the controversies of yesteryear always fade away, even though in their day they dominated the news and the mind-space of politically conscious voters.

Take the Silver vs Gold movement. When America was founded, it had a bi-metallic standard, meaning that both silver and gold were legal tender. Congress set down in writing how much weight of silver made a dollar and how much gold made a dollar, and so both could be used to buy and sell. But of course, as commodities the price of silver and gold in the market would fluctuate, but congress didn’t understand or act quickly enough to fix things.

For example, silver mines in Mexico continued to run and depressed the price of silver relative to gold. This created an arbitrage opportunity because the price of gold was higher than that of silver:

  • Take 10 silver dollars and exchange them for 10 gold dollars, as they are equivalent
  • Take the gold dollars to Mexico and melt them down.
  • Take that gold and exchange it for raw silver
  • Bring that silver back to the Mint in America and demand to have it struck into silver dollars. Because of the price difference between silver and gold, the silver you brought back will make more than 10 dollars worth, so you can pocket the extra as your profit.
  • Start back from the beginning, trading 10 silver dollars for 10 gold dollars

This happened because congress set a fixed value for a commodity who’s value changed on the market, and as that value changed there was arbitrage created. Gold flowed out of the country and was replaced with silver. When the California gold rush happened, the price of gold suddenly decreased and the whole process reversed. Congress didn’t understand what was happening, and so simply decided to remove the bimetallic standard to stop this from happening.

But now we get to “The Crime of 1873.” When congress removed the silver standard in 1873, silver miners could no longer have their pure silver struck into coins that could be used as tender. The mint was by far the largest purchaser of silver and so removing silver from the standard removed most of the demand and so killed the price. Congress therefore upended the livelihoods of thousands of miners and mining towns by changing the laws on coinage. And those people never forgave them.

For years this “Crime” was the hottest topic in certain political sections. It was the litmus test for candidates and parties. And it was the entire foundation of the presidential candidacy of William Jennings Bryan. For years, certain voters would never vote for a candidate or party who had supported the “Crime,” and they may not have even kept polite company with voters who supported those candidates. In its time, the “Crime” was seen as the greatest betrayal possible, and plenty of people pointed to it as the reason for national or local economic problems. They blamed the “Crime” and hoped that overturning it would fix things.

Of course, America never regained the silver standard. For a time, the Federal government compromised and declared it would still buy silver from the miners directly, but in time even this subsidy was removed. The people affected by the “Crime” probably never forgave the Republicans (who passed the bill) for what they did. Indeed the “Crime’s” authors had a hard time defending their actions in the face of angry voters. Some authors claimed that the bill didn’t do what critics claimed, and that the US had technically been non-silver since 1853. Others claimed that ending the silver standard was an unintended biproduct. But this had the perverse effect of amplifying conspiracy theorists who believed the bill was passed with malicious intend, and giving ammo to those who wanted to overturn it.

In the 1880s and 1890s, the “Crime of 73” was as much a controversial topic as any political topic today. Friendships could be ended by it. But it too did pass. I think most of the controversies of our day shall also pass, these days even American History students will barely remember the “Crime.”

Tariffs are taxes, I’m tired of pretending otherwise

Every politician says they’re lowering taxes. Or if they raise taxes, it’s only on the rich, poor people definitely deserve lower taxes. So do middle class people (where “middle class” equals “everyone less than rich” and “rich” equals “everyone richer than my current audience and me”). Taxes are unpopular and taxes shouldn’t be raised.

But tariffs are fine apparently. In a new wave of protectionism, Biden and Trump have jacked up tariffs on everything from solar panels to lumbar. And despite claims of “national security” and “containing China” these tariffs have most strongly hit America’s allies such as Canada and Germany. The national security claims are bunk, these tariffs hit allies far more than they hit enemies.

But still Biden doesn’t get pushback for raising taxes because “tariffs” aren’t seen as taxes. Wrongly, most people don’t realize that slapping a tax on imported goods raises the price of all of those goods, even the locally made ones. Think of it like this: if Biden slapped a tax on Pepsi such that every Pepsi now costed 5$, would Coca-Cola sit back and keep their prices? Of course not, as a greedy company Coca-Cola knows that customers will flock to its lower-priced products, and this will give it the ammunition to raise prices to juuuuuuuust under what Pepsi has. So now 4$ Cokes will become the norm.

So too does it happen with tariffs. When you raise the price of Canadian lumbar, American lumbar companies also raise their prices because they know the consumer has no choice but to take it. When you raise the price of German steel, American steel raises its prices. These taxes on foreign goods have raised the price on all goods. They then raise the price of what those goods are used for, for example lumbar tariffs are raising house prices. And what do you call it when the price of goods rises over time? Inflation.

Biden’s tariffs are adding to inflation. Trump’s tariffs are adding to inflation. Tariffs are nothing more than a tax on goods, a tax that the poor and middle class pay most as they are the ones most damaged by inflation. I’m tired of house prices soaring in part because of these new taxes. I’m tired of solar panel prices soaring as well. It’s all very two-faced of the Biden admin to claim global warming is an existential threat and then do everything in their power to kill the solar industry with new tariffs. Taxing it into the ground only makes global warming worse.

So I’m tired of these tariffs, they’re nothing more than a tax. And I’m not going to pretend otherwise.

Have IPOs become more speculative?

This post is very late because I didn’t feel good about my conclusions, but here it is.

I’ve been wondering if IPOs have become more speculative of late. Rumors abound that OpenAI (makers of ChatGPT) may IPO soon and they’ve been quoted as having a billion dollars in revenue and a valuation of 80 billion. 80 times profit is already a pricey valuation, 80 times revenue is even moreso. And other even more speculative IPOs have happened in recent memory. Companies like CRISPR Therapeutics and Beam Therapeutics IPO’d when they have essentially no revenue, just patents.

It was once said to me that IPOs are “supposed” to be for a company that is profitable. The company shows the world that it is profitable and can thus afford to pay a dividend. The investors of the world will then pay for stock in the company in order to grow their money. So the company gets a big pile of cash by selling shares, and the investors get shares which pay a dividend and may grow in value also.

The above is a very 20th century view of investing, these days dividends aren’t all that popular to begin with. So too does it seem that many companies will IPO long before they can afford a dividend, and long before they are profitable at all, so why are investors investing and buying these stocks?

It isn’t necessarily a bad move for investors to buy stock in OpenAI if it does IPO. The investors are speculating that while it’s not profitable now, it will be in 10 or 20 years. In essence, an IPO like this lets investors play the role that venture capitalist play. Venture capitalists invest in many startups long before they see revenue or profit, and they bank on the fact that while 10 startups may fail, the 1 that succeeds will let them see more than 10x gains. With companies IPOing early, normal investors can now also play this game. Beam Therepeutics, CRIPSR Therapeutics, and OpenAI may all fail, but if you invest in them and 10 other speculative companies, then maybe 1 will succeed which will give you gains that wipe away all your loses.

So I can’t say that companies IPOing earlier and earlier is a bad thing. As long as they don’t lie on any of their forms, then investors know exactly what they’re getting into. Investors know that they’re buying into a very speculative, pre-profit, maybe even pre-revenue company. But if it works out, they can make big gains. And remember that “investors” here isn’t just faceless, deep pocketed billionaires. Investors is also every person with a 401k or IRA. They too can buy into these companies using their own money and play at being venture capitalists. And if its so profitable for venture capitalists to do this, then why shouldn’t the rest of us do the same?

But while I cannot say this is a bad thing, I also cannot say if this trend is even happening. Remember I started this story by asking if IPOs are happening earlier and earlier. Is it true that in the 20th century, most IPOs were of profitable companies, and in the 21st century most IPOs are of unprofitable ones? Or is that simply recency bias at work? I tried and tried but couldn’t find hard numbers on this kind of thing, which is why it took me so long to write this post.

Either way, if OpenAI does IPO I might toss a few dollars their way. Intellectually I know I probably can’t beat the market, but emotionally it’s fun to pretend I can. And where’s the harm in that?

Shadow boxing the NIMBYs again: luxury vs low income apartments

Warning, this post is longer than usual.

NIMBYs will give any excuse to block housing. There’s two examples of this I’d like to discuss, one is the “luxury vs low income” false dichotomy. The other is when NIMBYs try to change the subject and ban corporations or foreigners from owning housing.

Let’s get one thing clear: affordable market-rate housing is just housing that has been on the market for a while. Houses built in the 80s are affordable now, even if they weren’t affordable when they were built in the 80s. Houses built this year generally aren’t affordable, but will be in 40 years. In economics you’d generally assume that products will be built for every level of customer. For rich customers, expensive products with expensive material are built. And for poor customers, cheap products with cheap material. Housing doesn’t follow this because of a few reasons.

The first reason is that for the past 50 years, much of the cost of building a house comes simply from getting permission to do so. There is a huge barrier to making housing whether you’re trying to make cheap or expensive housing. Cheap products can usually make up the different by being mass produced, but these barriers to housing (aka zoning etc) excise most of the benefits of mass production. That means there’s no point trying to mass produce houses anymore and make up in quantity, you can only produce quality houses and make up the difference using high prices.

The other reason that housing doesn’t follow the pattern is because it’s a good that lasts so long. Food is gone very quickly, whether it’s expensive or cheap. But an expensive or cheap house can last a hell of a long time with regular repair. Of course it slowly degrades, but that just means an expensive house slowly becomes a cheap house as its value on the market declines (or this is what you’d expect to happen, but if housing supply is constricted, price remains elevated). So again, a developer isn’t incentivized to mass produce cheap housing because anything built more than a decade ago has already become cheap housing, a developer of cheap housing is thus competing with the entire city’s housing stock.

For those two reasons, developers like to build “luxury” housing, including condos and apartments. Whenever these things are built, certain NIMBYs come out of the woodwork to protest the housing using vaguely left-of-center vocabulary. They’ll say things like “these expensive apartments are only for rich people! That won’t help the housing crisis for poor people!” Then they try to stop development with their economic illiteracy.

Those NIMBY arguments are just plain wrong. ANY increase in housing supply will lower the cost of housing in the market, even if it’s luxury housing being built. If this luxury housing isn’t built, then the rich people are forced to compete with the middle class people for the middle-income housing. The rich can afford to spend more, and so they drive up the cost of middle-income housing. If instead the luxury housing gets built, then the rich are spending their money on that, so there’s less demand for middle-income housing. Now more middle class people can afford middle-income housing, so they don’t have to compete with poor people for cheap housing. All this means lower prices for the middle class and the poor as less people are competing for the same amount of housing, and it happened because the rich were able to move in to those new luxury units.

So stop protesting luxury apartments, they lower the cost of housing just as much as cheap affordable apartments. And in 40 years those luxury apartments will have worn down a bit and will now become affordable so anyone can move into them.

The other thing I’d like to hit out against is people trying to ban foreigners and corporations from owning homes. Canada recently enacted a ban on foreign home buyers, and I have two problems with this. One: it will not do anything for affordability, foreigners make up a tiny percentage of Canadian home buyers. Number 2 ties into the ban on corporations, so let me discuss that.

There’s a knee jerk reaction by some that corporations and investors are at fault for driving up the price of houses. But corporations don’t live in houses, people do. A corporation only buys a house because they think they can make back their money by selling or renting it to another person. This implicitly requires that corporations think the value of houses will continue to go up, and monumentally so, otherwise they’d lose money on this transaction. So are you angry at corporations buying houses? Then the solution is to build more houses so the market is flooded and the corporations lose out on their investment.

The second part of this knee-jerk is an economically illiterate idea that corporations are just vampires sucking value out of the economy. If only we banned corporations, then all the prices would go down due to less competition and there’d be no downsides whatsoever. But if you think about it economically you’d realize that corporations are providing a form of service by being in the housing market: they are providing liquidity to the housing market.

Liquidity is most well-studied in places like the stock market. A lack of liquidity can lead to wild swings in prices, both up and down, and is generally regarded as a bad thing for the market as it hurts both buyers and sellers. When you want to buy shares of stock, you don’t need to match yourself to a single individual who wants to sell the same number of shares you want to buy, at the same price you want to buy them at. Instead, market makers create the liquidity by buying and selling lots of stocks. The market makers don’t want to hold any stocks for long, they just want to buy and sell them.

When I buy a stock, the market maker is immediately able to get it for me, as much as I want, and at the market price. When I sell a stock, the market maker immediately takes it, and again they take as much as I give them, at the market price. I don’t have to find an individual buyer and seller, everything can happen through a single market maker who is interacting with not only me but every other buyer and seller in the market. This is actually much more efficient than if every buyer and seller had to go out and find someone to trade with, we all just go to a single person, the market maker, and get the market price from them.

The market makers are in turn taking on a lot of risk, and using a lot of stats and technology to mitigate that risk. When I sell them some Apple stock, they are willing to buy it immediately on the assumption that somewhere out there someone will buy it from them for more. They take a small cut, usually a cent or so per share, which helps hedge against falling prices in the few milliseconds it takes them to find a new buyer. But there’s a risk that if Apple stock falls fast, they’d be left holding my stock which is now worth less than I sold it to them for. But market makers are large and invest in a lot of technology and statistics to be able to take on that risk.

But now imagine there were no market makers, the stock market would have a lot less liquidity. Any time I wanted to sell Apple stock, I’d need to find an individual who was a willing buyer. But if the price of Apple is falling fast, investors will get skittish, they’ll be worried about getting caught out, and most of them won’t have statistics and technology that the current market makers have. Thus they may not be willing to buy from me, thus I’ll have to lower my price even more to find a buyer, but that makes the price of the stock fall even faster, meaning that investors get even more skittish and even less willing to buy…

This is what’s called a liquidity crisis, it can happen to stocks moving both up and down. Lack of liquidity leads to wild swings in prices which hurt both buyers and sellers and generally mean people lose more money from the market than if it were liquid. But these days liquidity is generally smoothed out by the market makers. For all that conspiracy theorists hate them, the market makers are why buying and selling stock is so seamless, easy, and reliable these days. Large price movements are smoothed out by liquidity, and any buyer can find a seller and vice versa so people can enter and exist the market whenever they wish.

Now let’s say for a moment that corporations are prevented from buying any housing. Let’s even take the more radical proposal I’ve seen that says no one should be allowed to own more than 1 house. And let’s see the results this would have on the housing market. Spoiler alert: a lack of liquidity in the housing market would hurt both buyers and sellers.

So when you want to sell a house, you have to find a buyer. In our theoretical “no corporations, 1 house per person” market, you’d need to find someone who actually wanted to live there. Someone who wants to live exactly in your area and in your house. If your house is a fixer-upper, you need to find someone who is willing to buy and fix a house. The need to find someone willing to immediately live in your house, right now severely limits your potential pool of buyers. Maybe people just don’t want to fix a house these days, so even thought the repairs aren’t that bad, you’d now have to either do them yourself or lower your price by a lot in order to find a buyer.

Now when corporations are allowed to buy homes you can find a buyer immediately. The corporations then takes on the risk of finding people to buy the house, they take the cost of showing buyers around, of fixing up the house if need be, of advertising it, etc. Corporations are providing liquidity to the housing market, which prevents giant movements in price. Someone who needs to sell their house in a hurry might otherwise be forced to cut the price 20%, 30%, 50% if they just can’t find a buyer within a month or two. But a corporation can buy the house at its full price and can then afford to sit on it for a few months waiting for a new buyers to come along. So people selling their house get the best price possible because corporations are providing liquidity.

If you want to buy a house, you also have to find a seller. Most houses aren’t for sale at any one time. But it would be a nightmare without corporations because then you would actually have to find someone who is actively moving out of their current house. Very few houses are being built (thanks again, NIMBYs), so any house you want to buy will be pre-owned. And remember we’ve banned corporations and multiple home owners, so that house isn’t being kept empty, it’s lived in. That then means that you have to move in at precisely the time they want to move out, otherwise either you’ll be caught homeless for a time or they’ll run afoul of the law because they’ll own more than 1 house at a time. It would be difficult, maddening even to line up your schedules.

This maddening scenario is exactly what’s going on in Britain right now. The British housing market is extremely illiquid not because there are corporations but just because there is an extreme shortage of houses period. The UK has the largest housing shortage of any member of the G7 or G20, meaning that there’s basically no houses anywhere sitting empty. In America, about 9% of homes aren’t currently lived in. Some are dilapidated, but some are just being held while buyers and sellers find a price. In the UK, that number is around 3%, and again many of those are dilapidated and unlivable.

The lack of empty homes in the UK means that anyone looking to move in must first wait for the owners to move out. Of course no one wants to be left homeless, and no one wants to own two homes at once and be forced to pay taxes on both, so Britain has an insane system found no where else in the world called “chains.” In a chain, every property sale has to execute at exactly the same time so that multiple people can all move into/out of houses at the same time. These chains can have over a dozen links, and so of course you can imaging getting a dozen families to all agree on a move date is a nightmare. This system is basically completely unique to Britain, I haven’t heard of it anywhere else, and it is all due to a lack of liquidity in the market, although here brought on by comical undersupply and not the banning of liquidity-assisting corporations.

The chain system is an absolute mess, you can search social media for the horror stories of people losing jobs because move-ins were delayed, or losing money because they had to expedite a move-out. Nothing works the way it is supposed to because the market is so illiquid, and everyone in the British housing market is tangibly worse of because of it. And that’s exactly what we’d get if no one were allowed to own a home they didn’t actively live in.

Corporations and home investors, foreign or native supply liquidity to the housing market, they do not make house prices go up. House prices go up because there is a lack of housing supply. If you’re tired of corporations owning homes and want to force them to lose money, then you should demand your city allow anyone and everyone to build a house on any plot of land that they own. Yes even your neighbor. If your neighbor wants to subdivide his house to build a duplex, let them. If they want to sell to a builder who will demolish the house and build an apartment block, let them. If some developer wants to buy the vacant lot across the street to build condos, let them. If a big developer wants to buy the convenience store down the street and build a 5-over-1, let them. Only by having more housing in everyone’s back yard will the cost of housing go down.