Friday, January 18, 2013

End Times: Inaudible Whimpering

Once, back in 1983, the magazine Scientific American (acting through one of its then columnists, Douglas Hofstadter), ran a contest to win a million dollars.

The rules could not have been simpler. Simply address a postcard to the magazine, and send it in. If only one card was sent in, that lucky person would win the entire prize -- one million dollars. But if there were more than one entry, the prize would be equal to $1 million divided by the total number of entries.

Thus if 100 people sent in cards, the lucky winner drawn would receive $1,000,000 / 100, or $10,000. And if 10,000 people sent in cards, the winner drawn would receive $100. Whatever the prize, it was guaranteed to be paid by the magazine itself. There was only one catch -- the amount to be paid had to be paid in legal tender, i.e., in lawful money of the United States.

Oh, and there was one other simplification of the rules. You might want to send in 100 entries yourself, or perhaps 1,000 entries, in order to increase your chance of being drawn as the lucky winner. In 1983 postage, that would have cost you thirteen cents per entry, or $13.00 or $130.00, depending on whether you sent in 100 or 1,000 postcards. So the contest devisers announced that any number of entries could be submitted on a single postcard -- just write the number of entries you were submitting on the card.

After the contest closed, it turned out that some entrants had submitted cards with extremely large numbers written on them -- ten to the 30th power, ten to the 100th power (a "googol"), or even a googolplex, which is a googol raised to the 100th power. That is the quantity ten to the hundredth power raised itself to the hundredth power -- a fantastically large number, way larger than any known physical quantity (e.g., the number of electrons, or of fundamental particles, in the universe).

So who won the contest?

No one, of course. The amount of the prize, as defined by the contest rules, was $1 million (i.e.,106 dollars) divided by n(10100)100, or an amount far smaller than the smallest measurable volume in the space of the known universe. (That space is defined by the Planck length cubed, or 4.222 x 10-105 cm -- a number which is easily seen to be way larger than  1/n(10100)100cm3.) Needless to say, the United States does not have any money of a denomination that small, and so the prize could not be paid out to anyone, regardless of whose card was drawn, and regardless of how many entries were written upon it.

And the point of the contest? To show that individual greed would win out over rational communal strategy every time. The phenomenon is called a "largest number game," or a "luring lottery."

In other words, it would have been in the interest of those who heard about the contest (mainly, the readers of Douglas Hofstadter's column in the magazine) to agree to limit their entries, so that the prize award to any one of them would be maximized -- after which, if they all agreed, the winner might split his takings among them.

(Of course, the rules forbade overt collusion. And even then, any strategy to violate the rules was not likely to pay off handsomely. If, say, 30% of 1,000,000 Scientific American subscribers saw the column and colluded to send in just one entry for the benefit of all, then each colluder would receive [assuming all collusion provisions were honorably followed] exactly $3.33. And if anyone outside the scope of the collusion agreement submitted a postcard with a large number of entries, the reward would soon vanish to the diminishing point.)

So what, finally, did the "contest" demonstrate? Why would any rational person take part in it, given human behavior's natural response to its terms and conditions -- to act in such a way that maximizes one's own chances of winning, but at the same time thereby ensures that no one will win anything?

For a present-day answer to that question, consider the current relief bill for "Hurricane Sandy damages" that is just now passing Congress. By all accounts, it is loaded with local pork (the great majority of which is not even for any areas affected by Hurricane Sandy). Indeed, the amount of the pork is said to be around 80-95 % of the total legislation of $60+ billion.

(Historical note: take this current legislation as an index of how far we have slid down that slippery slope identified by President Grover Cleveland in 1887. In vetoing an equivalent relief measure voted by Congress that year -- to aid farmers in Texas stricken by drought -- he asked the timeless question: "If the Government supports the people, who will support the Government?")

Just how can this be? you ask. I thought legislators had agreed to vote for no more pork. And just who made that agreement?  Congress. It's called a "Continuing Resolution" -- to keep government operating at its current level. There's been no "new" spending in that sense until now, even though we were still spending at least $40 billion each month over what we take in. 

Right you are -- or were. If Congress never met and did nothing this month, we would still be in a situation where the Government would be spending $40 billion more than its income -- thanks to the passing of previous continuing spending resolutions by an ever-compliant Congress. We have, indeed, gone in just five years from a government with a mandated budget to one that is unconfined, and simply spends freely. Every 90 days or six months Congress authorizes further spending at the same level as before, but without adopting any budget.  (Congress adopted the last national budget in 2008, to cover the last fiscal year of the George W. Bush administration.)

As just noted, the problem is that, authorized or not, the government has been spending $40 billion more each month than it has in income (revenues). And now, in just the first month of 2013, Congress is passing a bill that will add another $60+ billion of mostly pork to that spending, which is already way beyond our means. Meanwhile, the President has, by executive fiat, raised the salaries of everyone in government -- to the tune of another $1 billion per month. On top of that, he is brazen enough to ask Congress  to "remove" the debt ceiling, so that there would be no limit whatsoever upon the amount his  administration could borrow from year to year.

All this adds up to the conclusion that the United States of America is now conducting a "largest number game," which will herald its fiscal demise. The short-term winners are those who take home the bacon (pork) to their States right now, but in the longer term, we are all bound to lose. The government, at this rate, will inevitably run out of "other people's money" to spend -- because there are more and more demanding that it spend (other people's) money on them.

The current members of Congress, and their constituents, evidently do not care. They are acting just like the people in the Scientific American contest who sent in postcard entries with impossibly large numbers written on them. Even though their actions guaranteed that no one could eventually collect the prize, they could not refrain from trying to "win" by the easiest means, no matter what a rational strategy may have suggested.

Congress, thus, has now instituted a lottery -- with your (and the Chinese government's) money. The winners send their Congressional representatives back to vote for more -- until there will be no money left, so that in the end, all of us must lose. As a result of our borrowing more than we take in, year in and year out, the countries who have historically been willing to lend us money will come to see that this is a sucker's game. And then the lending will stop.

Even if the lending from other countries stops, however, the Federal Reserve can still step into the breach, and buy all of the government's bonds. After all, it has an unlimited checkbook, which by design it can never overdraw. But if the Fed is the only entity buying government bonds, that means that the money it "pays" each month for those bonds becomes worth less and less -- and inflation takes off, eventually (and inevitably) to become hyperinflation. (The more inflation increases, the more money government has to borrow to spend, and the more the government borrows to spend, the more inflation increases. It is, perhaps, the original vicious circle.)

So that is where this government, and this Congress, are headed. But as noted above, there can be no ultimate winners in this luring lottery. Short-term, perhaps -- but long-term, no. And if there can be no long-term winners, then what happens to those profiting in the short term?

Answer: they lose as well, just as if they had not won anything. The money they gained at everyone's expense becomes worthless -- not even worth the cost of the paper and ink it will take to print it.

Unless this vicious circle can be voluntarily halted, the outcome is inevitable.

But the voices calling for a halt -- just like the voices of those who said "do not send in any postcards to the Scientific American lottery" -- are below the threshold of audibility.

And thus we shall come to our end -- not with a bang, but with an (inaudible) whimper.


  1. I was just reading an analysis by our state hospital lobby of how our state would benefit from "opting in" to the ACA Medicaid expansion plan. The greed was evident in the reasoning that assumed opting in was good because all those Federal dollars rolling in would result in growth of our state's economy. There was no mention of the fact that those Federal dollars were not real dollars but money borrowed with no expectation for it to ever be repaid.

    Once again, "If the Government supports the people, who will support the Government?"

  2. In Mexico, after many years of authoritarian socialism, a questionnaire was circulated in some of the upper-middle class secundarias...the ninth graders are graduating and heading out prep schools and so forth. The are ebullient. They check off and fill in some answers while waiting for the last bell of the primary and secondary careers.
    The history teacher gathers up the papers, the bell rings, there is cheering and running, and all nature of celebration. The history teacher sits dejected behind his silent desk in a quieted room. He has review every answer of 36 "pups" of the upper-middle class...."Where does money come from? How do people make money?"
    The answers, (1) The government and (2) by asking the government for money.

    The progressives have poisoned so many wells that we shall soon have to pass another Dark Age to set the default switches back to "normal" somehow.

    And again,"If the Government supports the people, indeed, who can,will, or should support the government?"

    We retire. In the morning it will be warmer and some Saint will bring me a lantern to find the path that leads from this morass.

    El Gringo Viejo

  3. US Federal finances are not a luring lottery. A luring lottery is a one-time event with limited public information that forbids collusion in which the "currency" of entries and "monetary base" of entry numbers is manipulable by each applicant. In a luring lottery, every applicant has his or her own personal Federal Reserve Bank. And then each printing press is pitted against the others in a hyper-inflationary race.

    In the real world, only the Federal Reserve can print dollars. It's as if contestants in the SciAm contest had to purchase each entry, aka "dollars" from some central authority. If that authority pursues a target inflation rate of 2% annually for instance, then the total number of entries will be capped in the first contest by the size of the initial monetary base and will grow slowly over the years from contest to contest.

    In the real world, the Fed is fairly independent of Congress and incentivized to fight strong and moderate inflation. It pursues a target inflation rate of... 2% annually. Accordingly, inflation hasn't cracked 3% a year since 1991. And the world is currently willing to lend the US government dollars at about a 3% nominal rate for 30 years. Of course, if Congress and long-term poor economic growth run up much bigger debts (Jap's debt is about 2.4X bigger relative to its economy but its inflationary rates and interest rates are still holding low), then the Fed might be pressured to let inflation rates increase. But in a bad scenario, we might be talking about 10% annual inflation not anything near the kind of hyper-inflation found in a luring lottery.

  4. theplantagenets, I humbly submit you misunderstand the thrust of my post, which assumes a totally compliant Federal Reserve which is willing to accommodate any and all of our legislature's spending resolutions and bills, regardless of its "target" rate of inflation.

    For the present, the Fed is being totally accommodating to all deficit spending because the deflationary bankruptcies, foreclosures and other fiscal failures are destroying just about as much of the money supply as the Fed is creating. So the Fed can correctly claim that it is meeting its target inflation rates -- but that has nothing to do with the Fed's (or the government's) policies.

    To analogize, it's as though the Fed were claiming credit for keeping the tip of an iceberg above water, because it is controlling the surface temperature of the part of the iceberg that is above water. But all the while, the water itself is melting the far greater submerged part of the iceberg.

    The iceberg will continue to float for quite a while, as long as the temperature above the water does not rise significantly above the temperature below the water. And eventually, despite all best efforts, the iceberg will meet the fate of every other iceberg, and dissolve completely into the ocean, no matter what the surface and water temperatures are. Ice cannot permanently survive in water. (Nota bene, Fed.)

    Thus for the Fed to claim that by keeping inflation in check, it is keeping the iceberg afloat, is as misleading as claiming that one can keep the iceberg floating indefinitely by regulating only the temperature of the atmosphere.

    So long as the Fed writes blank checks to cover our legislature's continued deficit spending, so that no individual legislator, or small group of legislators, has to "print" their own money to support their spending decisions, then what is going on at the national level is a luring lottery.

    There is no disincentive for voting for more and more spending than the next fellow, and the only necessity is to gather enough fellow pork-larders to ensure a majority to pass whatever measure they want to gather around. (The President will sign it, because he has never yet encountered a spending proposal which he cannot approve. And in that respect, he and the Fed are co-collaborators with Congress in the demise of the dollar as a reserve currency.)

  5. I enjoyed the luring lottery definition and example; that was new and interesting to me. But let's not be led astray by the vividness of that scenario and then over-generalize its points of contact to current public finances.

    1) Assuming that the Fed will inflate away the debt and kill the dollar's reserve status is a big if. Yes, if the Fed continues QE indefinitely, then bad things will happen. But if you had extrapolated out from the Vietnam War (or any other modern war) indefinitely, then you would have gotten a holocaust. But things change. Once we get through our need for current short-term deficits, it's not hard to imagine interest rates rising at the behest of the Fed or foreign investors as you do and then inflation going down.

    2) But right now there's minimal inflation. If we're accelerating towards the pavement, how come there's no wind? If minimal levels of current inflation are irrelevant to your argument, then isn't your argument impossible to falsify? Or are you claiming that there is invisible super inflation "below the water line" of your iceberg analogy? We don't live in a POW camp; there's no shadow economy that dwarfs the size of the visible economy.

    3) I suspect we agree that long-term entitlement spending needs to be reigned in (or taxes raised). I just don't think that need is predicated on the Fed going rogue for the next 30 years. More likely, interest rates do rise, and swelling interest payments begin to smother growth. Long-term debt is bad in part because it reduces the government's ability to fund stimulus packages that are helpful during recessions.

  6. I'm convinced that some commenters here do not do the grocery shopping or put gas in their tank or pay household bills, or they would not claim inflation to be only 2%. What our gov't uses to measure inflation are not the necessities of life.