Here is a counterintuitive truth I have discovered about the physical world.

Every Friday morning I get out of the subway at 34th and 7th, south-east side of the street, and proceed to walk to the middle of the south side of 34th street between 7th and 8th. To do so, I first have to cross the human river pouring out of the exit of Penn Station, shown below.

The thick white arrows denote the humans coming into Manhattan to earn their daily bread. They stream up the stairs and then through the anti-terrorist anti-vehicular barriers you can see in the photo, and then fight their fluid way onto the the 34th Street sidewalk.

The thin white line at the bottom of the picture has been my usual path. I approach from the subway exit at the left, hit the crowds and then move away from them to try to dodge the crowds as they spurt out of the barriers. It doesn’t work very well, because I am trying to cross, perpendicularly, all of these agents.

Last week I tried a new strategy: see the heavy red line at the top of the picture. I headed right into the dense thick of things behind the barriers. And Lo!, there they are moving slowly, held back by the barrier, and it’s easy to cross the flow. You easily emerge with them and go where you like.

Go into the thick of things and it’s easier to go where you want. Counterintuitive, but you can test it, and it’s true.

As I understand it, all money is really an IOU created and issued by someone. When McDonald’s gives you coupons, you’re taking their credit; similarly with Frequent Flier Miles, and similarly with a bank that lends you U.S. dollars. All of these institutions are creating money, their own currency.

The question then is: what if they can’t fulfill their IOU?

In the case of McDonald’s, who cares?

With frequent flier miles, it’s irritating when they change the rules on you or impose blackout dates, but that’s what they do. They had given you a floor value for the miles, though you could trade them to someone for a fluctuating amount, and then they changed the value of the floor. Foul play.

The U.S. dollar is an IOU issued by the Treasury and backed by the full faith and credit etc. Which means what?

Under the gold standard, your dollar could be exchanged for any product in the world at a floating rate, as money, but there was a kind of put embedded in the dollar: you could always put it back to the U.S. Treasury for a fixed fraction of an ounce of gold. (Similarly, a Zimbabwean dollar can be put into a U.S. dollar.) The riskier the government’s policy, the more the put is worth.

Without a gold standard, the dollar has no embedded put at all, and therefore no floor.

It’s not so much the gold floor that matters, as the fact that there was a floor of some kind. It made the USD a collateralized IOU rather than one with limited (well, zero) liability.

It would be nice if all IOUs had embedded puts with floors to provide a realistic safety net. McDonald’s coupons could have a Burger King floor. Without a reasonable floor — the closer to at-the-money the better –  you have to keep evaluating the borrower’s business status, because you have no protection against default. If all IOUs had embedded slightly out-of-the-money puts into something of value that the the issuers actually possess and can be taken away from them, life would be simpler, though business would be slower.

What does a country that issues dollars actually possess that can be the underlier of the embedded put? Gold, or land. The value of land — if a dollar could be put into one square foot of land — varies too much depending on what people do with it. Gold is kind of useless but mysteriously valuable, so maybe it’s not such a bad underlier.

Martin Wolf in the latest FT comes across with heartfelt empathy for the difficult life of a central banker, someone whose limitless narrow power over the economy doesn’t extend to troubled individual consumers. Wolfe is against austerity but recognizes the political difficulties.

Gideon Rachman says there’s no alternative to austerity.

Paul Krugman sniffs, a little scornfully, still recommending more lending as a cure for too much.

When so many smart people disagree, how do they expect anyone to be convinced?

I am reminded of the equally counterintuitive advice I was given, as a teenager learning to drive, by my Juan Manuel Fangio-loving friend in Cape Town. No radial tires in those days, and cars skidded on De Waal Drive at 30 mph in rainy weather. I once braked slightly on the way to Varsity and had my car turn through 90 degrees and slide sideways towards some policemen at the side of another car that did the same. Luckily I didn’t hit them and they forgave me.

“Turn into a skid,” my Fangio-loving friend told me later.

It sounds like the wrong thing to do, but it’s right: if you turn into the skid, your wheels can start rotating forwards again and grip the ground, and then you can gain control and slowly steer out of it. Once someone explains it to you, you see the point, and you can put it to the test. That’s not so easily done with the economic arguments.

Ethical problems: University of Pennsylvania sloppy about hiring someone with a fake PhD, then reluctant to fire him.

Profit-making as a dominant goal: The New Yorker on Stanford as Get-Rich U. Universities used to be safe jobs whose sole glamor was intellectual. Now not only university presidents but even faculty can make large amounts of money by patents, connections with business, consulting, boards, angel investing. There are massive discrepancies in salary across the faculty.

The relentless desire to grow at all costs: NYU faculty complain.

Part of the trouble is the perplexity as to where universities lie in the spectrum of higher learning vs business. Forty years ago, at least in my imagination from the student side of things, it was simple: as far as admissions, your grades were supposed to be all that mattered (in England and South Africa, provided in the latter case, of course, that you were the right color) and everything else counted for nothing. Universities were supposed to be dedicated to learning and teaching, and tenure provided some freedom.

Now, universities are different.

They patent algorithms.

Pharma companies reside on their premises.

Administrators think it’s their job to be entrepreneurs & fund raisers and multinational foreign-campus operators. They have PR departments. They worry about U.S. News & World rankings, and adjust to optimize them.

Departments strive to provide executive education as a way of generating funds.

Schools worry about whether the students they admit are likely to be successful future donors.

They reluctantly inflate grades and are tempted to tolerate cheating, because their students are quite clearly customers. I suspect that in many schools it’s easier to get bounced for unPC behavior than for academic reasons.

In an era of diminished job security, universities offer lifetime-secure employment for some people via tenure. Kind of unheard of if you started from scratch with some new organization or business, in which a guarantee of lifetime employment would be an intolerable anachronism. And on top of it, universities increasingly rely for teaching on a host of low-paid adjuncts.

I have no idea what the solution to all of this is; everything and everyone is different now. (And who I am to talk? I never thought I’d use so-called social media, and here I am.) In a way I liked the past better, but as with all else, we’re not going back there.

The hell with that.

The other day I used the Chase app on my iPhone to deposit a check from my health insurance for $17.32. The app made me enter the amount,  and then asked me to use my iPhone’s camera to photograph both the back and front of the check. Then it sent it off, and later, I got an email telling me that the check had cleared.

Impressed, I sent out a short tweet saying “Chase iPhone app lets you deposit checks by photographing them. Just did. I’m hoping you can soon deposit cash the same way.”

Soon after I received a tweet from @ChaseSupport: “@EmanuelDerman Glad to see that you’re using our mobile app! Cash quick deposit isn’t on the roadmap, but I’ll forward the suggestion.”

They didn’t seem to realize I was kidding, and that photographing cash to deposit it is fraught with problems.

But then I wondered what would happen if I posted photos of my $17.32 check on the internet and encouraged everyone to deposit it photographically? Eventually all the copies of checks would bounce back to the original issuer and flood him. It could be like a  distributed denial-of-service attack that brings down the banking system. Probably I shouldn’t be allowed to publish this idea.

I suspect that the idea of a denial of service attack originates in college dorm stories about everyone simultaneously flushing the toilet while someone is showering. You can read about the infrastructure implications here.

Some people argued that one should end not just the human experiment but the entire life-on-earth experiment, and humans did briefly consider putting an end to the reproduction of all life forms. Other people argued persuasively that (a) it wasn’t practical to eliminate every single species, especially the invisible ones, and (b) it wasn’t up to humans to make decisions for others. What was most convincing about the plea to let other species be was the argument that, since eliminating sexuality was really an attempt to eliminate pain, humans had no right to inflict on other animals the pain of forcible elimination of sex. This argument won the day. So, humans simply decided to stop reproducing, voluntarily, but to let animals and germs and viruses be. Some people suggested that in that way evolution might throw up something better, but no one really cared. It wasn’t their business.

It turned out to be easy to convince people to try to stop reproducing. And once everyone agreed, it wasn’t that hard to put into practice. People took to the idea surprisingly quickly. For a brief time some continued with occasional acts of contracepted sexual intimacy, but soon found that the greater ideal of human interactions free of the strains of lust was workable and preferable. Boys and girls became really good friends, even post adolescence; competition between people of the same sex and between the sexes themselves decreased; husbands and wives stopped arguing; eventually even gay couples whose continued sexual behavior would have been compatible with the cessation of the human race found that they weren’t really that interested in the act itself. As a result, everyone went about their work more seriously and the experiment became a movement and a success. Life became pleasant, though never ecstatic, and that seemed good.

It was soon realized that as older people died out, there would be no new generation to support the decreasing population. Since the avoidance of pain was the original aim of the entire project, no one wanted to inflict the pain of limited food and medical resources on the last members of the human race who would be living their final years in seven or eight decades. It became obvious that planning was necessary to ensure that, as the population diminished, there would still be essential services, and luxuries too. Public planners devised an optimal scheme of training for rotating duties, for the creation of automatically sustained power plants, for the stockpiling of canned and frozen food, for the supply of vitamins and drugs and partially automated medical care, so that as the population diminished, there would always be sufficient production and storage of food, clothing and medical supplies to support the remaining people. Less and less would of course be needed as time went by.

“I must accept that my body cannot do too many things at once. I must learn to say, ‘No.’ I must take care to get sleep. I must think of myself. I must do things that are fun. I must get the ‘musts’ out of my life.”

The instructions a therapist in Sweden gave to an apparently fairly healthy
golf-playing woman who was on state-paid disability for three or more years.
2002 article in the NY Times

I recalled and then tracked down the existence of this self-indulgent-sounding paragraph in an article I read ten years ago. I was kind of struggling to do a thorough job at something I must do but didn’t feel like doing, and suddenly it popped into my head.

A good deal of the ‘musts’ I experience come from feeling that professionalism demands doing certain things thoroughly and expertly. But some part of me wants to be expert only up to a point, and then I get bored, though even admitting that makes me feel a bit guilty. Sometimes it’s more fun to live by your wits, like Mercury/Hermes, the god of people who do that.

Must one do things as well as one possibly can? If you don’t want to, is that a bug or a feature? And, beyond a certain age, does it matter?

As I understand the money book, which focuses on Britain, money is at bottom created by commercial banks every time they make a loan. But the currency they loan in is created by the sovereign/state (or whatever passes for it) that gives the money practical legitimacy (for paying taxes, etc).  When states or sovereigns pass on, so, often, does their money. As John Kenneth Galbraith once said, “The process by which money is created is so simple that the mind is repelled.”

So, banks and states are cronies.  The state gives the banks (and credit unions, to a much smaller extent) the right to create new money. And the state borrows from banks, and bails them out when necessary.

It’s an incredible privilege to be able to loan people money you just created, and to profit from it. And it provides an incredible power. With great power should come great responsibility, and if it’s misused, the power should terminate post-haste. But states have too much to gain from banks. You’d think there’d be a better way to create and control money.

One of the things the book stresses is that, in the authors’ view, the key to avoiding bubbles is controlling credit creation. They seem to approve of creating credit for new ventures as opposed to buying up (speculating on) things that already exist (houses etc), and they speak somewhat approvingly of China’s policy of managing the uses of credit creation. (China’s premier is just beginning today to comment disapprovingly on monopoly held by The Bank of China).

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On a different note, one of my pet peeves is naive claims of science, these days the fashion for naive neuroscientists and multiversers, who claim to understand more than they can from their theories and models. As a result I am pleased to see a rising backlash against the recurrent claims of science every couple of generations to explain everything from outside. Here’s the latest debunking: Beware the Fausts of Neuroscience

Spiller Alert: This post may contain TMI about Miracle Workers and Bodily Fluids. You can stop now.

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“It wasn’t there in 2009, so that’s a bit suspicious,” I heard the CAT-scan doctor say. He wasn’t talking to me, thank God, because I hadn’t had my CAT scan yet, but it gave me pause for thought and gratitude.

The other day while teaching I suddenly briefly felt really ill with a pain in my lower back and then broke out in a copious cold sweat over every part of me; even the hair on my head was as wet as though I’d had a five mile run. I thought it was a muscle or bone pain from running that had gotten exacerbated, but, after thinking a while and really not feeling too good, I wondered if it mightn’t be a recurrence of a kidney stone I once had, which hadn’t been too bad at all.  Because I was supposed to go on a long airplane trip the following day, I went to the kidney stone doctor, a very nice man who saw me on short notice at 5 in the afternoon.

He poked and ultrasounded and saw nothing. If you have a kidney stone that’s blocking things on its way out, he explained, it causes fluid to back up into the appropriate kidney, and that fluid shows up as dark stuff on the ultrasound. There wasn’t any. The only way that wouldn’t be the case, he told me, was if the blockage had just happened and there hadn’t been time for backing up.

As a precaution he decided to look at the appropriate fluid and dipped a stick into a cup of it, which turned green, indicating a scratch somewhere upriver. What I’d had when I’d been in pain and sweating was renal colic, he told me, and my sweating had something to do with a vagus nerve. Then, bragging about how easily available top-notch medical care was in New York City, he sent me for a CAT scan right around the corner at 6 pm in the evening, in an Imaging Center where they were still busily working away. (They’re open on Saturdays too.) He also told me parenthetically that one day, when socialized medicine had overwhelmed him, too, he wouldn’t be able to respond with a CAT scan, but would have to follow some bureaucratic procedure that indicated what he was allowed to do given my symptoms. Who was I to argue?

No more than twenty minutes later they had (i) run me through the machine, (ii) seen a stone trying to make its way out, (iii) called my doctor, (iv) put him on the phone to me. All of them told me a long flight wasn’t the right place to be when the stone tried to escape again.

I chatted for a while to the CAT-scan doctor, who showed me my pictures and gave them to my on a CD.

“Fantastic how you can do this,” I said with admiration at the fact that they were actually doing somebody some good with all their mathematics that lies behind cat scanning, something I know a small amount about.

“It’s the machines we have,” he replied.

The mathematics of computerized tomography led to a Nobel prize for Alan Cormack, a University of Cape Town (ahem) physicist at the time of his publications on the subject in 1963/4, in a physics department that had had a long history of X-ray diffraction work. Behind my scan was some fundamental physics  and mathematics and then some really effective engineering, and I’m grateful for it. I just printed off his Nobel acceptance speech and I’m intending to read it.

(For those of you in finance, computerized tomography is a kind of calibration, like trying to figure out forward rates from bond yields or local volatilities from implied volatilities. Physicists call it inverse scattering — given the scatter, try to figure out the nature of what caused it. The difference is that it really works in medicine because it’s talking about something real you can do something about.)

Years ago, a good diagnostician would merely have stuck fingers into me and tried to figure out what was happening. Now, though my doctor did that too, he could get really detailed confirmation about location and size.

What fundamental theory and real engineering can do is amazing and accurate. Economists occasionally suggest that we have a similar investigative approach to economic diagnosis, but of course it isn’t possible. There are too many contributing causes to a human accident. A physical malfunction is often (not always) much clearer. Trying to understand what causes economic catastrophes is more like trying to understand what causes some mental illnesses — a host of things, perhaps.

So here I am, having been through Genesis and Numbers, and now waiting for Exodus and the crossing of the Red Sea. Meanwhile I’m feeling pretty OK, and went for a run in the park for the first time in a while and worked up a genuine non-vagus sweat.

I know many people who currently don’t and quite a few who never did. Some lived off inherited money. Some worked hard and successfully and made enough to do what they liked, and in their case “liked” meant no more work. (Some continued working when they didn’t need to. Is it work if you like it?) Others worked for a while and then tired of the slog, and lived off spouses or, very frugally, off whatever they had saved up to that point. And some essentially never worked, because they simply didn’t have what it takes to subject themselves to other people’s control, which is what most jobs involve; they survived however they could, some well and some poorly. It’s hard for me to decide whether living well without having worked is admirable or sad. I’m a bit of a Puritan and at bottom I’m afraid I don’t like to see people living well without having worked, though Calvin Tomkins has a positive view of it in his memoir of the Murphys in Southern France. But what would the world be without suffering (the mild kind)?

As more and more people I know edge into retirement lifestyles, I found myself thinking on vacation about how I’d like to live. I know people who travel nonstop, but that’s not for me.

My first choice is the life of a 1900s Viennese gentleman: wake up in the morning, croissant with butter and marmalade, coffee, read The Times, write for three or four hours — a good day’s work. Light lunch, nap, exercise for an hour or two, then theatre or dinner in the evening with interesting people.

Second is to be a sort of Lawrence Durrell on a small Greek island or a Caribbean or South Pacific equivalent, a British Colonial going native in an exotic place. Wake up in the morning, take a swim and a run on the beach, work for a few hours on writing on modeling (with the internet you can do this from anywhere), then the beach, then fresh fish at a local restaurant with local people, topped up by some conversation over cognac/rum/raki, an espresso and a cigar.

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Footnote is a movie about lives devoted to academic studies, sacrifice, competition, revenge, bitterness, inflexibility, family, family secrets,  etc, and a thriller at the same time.