Sridhar Vembu’s Blog

Sridhar-

I agree that the economic gap in the US has been determined by those who participated in the asset market since 1982 (inflationary boom) and those who didnt. However, I am confused as to when the political developments will occur that you correctly rationalize - economic redistributive politics that should be occurring but are not, in fact, taxes are being cut for the highest incomes and for asset gains, federal social programs are being cut and the military complex is moving in two directions - federal employment for the poor is being cut with base closures, yet Northrup Grumman still has huge Pentagon orders that are at least stable YoY. This is not redistributive today or in trend.

Mark

Sridhar-

You exude modesty. However, Bernanke and Greenspan ‘get it’ as well, but their personal prestige is based on maintaining status quo, not openly admitting how asset inflation causes 5x the pain of consumable goods inflation. They know how it all ends and know that history will cast an unfortunate eye on their tenure, but to be noteworthy in your generation for just a moment!

Imbalances in India and China are much different than imbalances in the US. Unhappy people in China still freeze to death in the winter time, unhappy people in the US have only one car. You can’t underestimate the power of an aristocracy derived from the power of two colluding and thoroughly dominant political parties. $100 gas checks are one thing, but when the mortgage cycle cannot continue to inflate the Fed will be forced to purchase everyones home from the FDIC cartel. They will monetize this multi-trillion dollar disaster and of course it will be up to China (and Japan) to whether they want to continue to hold treasuries in a dollar weakening (at least against goods) environment. But as you said, until they achieve export/domestic economy balance, it is a decision they will avoid until they cannot avoid it any longer.

I got off my point, a republicans best friend is a democrat, especially when they can rotate offices and nearly split the vote 50/50 everytime. The last thing either group wants is a third party. Politics will play major role in the reorg. but not the catalyst in the US. So they collude and keep marginal tax rates of the Forbes 400 at 39%, 15% when they sell equity and hand out $100 gas rebates whenever needed. Fiscal deficits as far as the eye can see. Achilles heel every single time: CHINA (and india to a lesser extent). Can’t get around it no matter how hard you try. They enabled the world’s largest credit expansion in history to occur and they will also be the purposeful and accidental cause of the long decent.

Can we get enough intelligent minds wired into the Internet and hope that Metcalfe holds up and Kuzweil isn’t inaccurate by decades to find a solution - 8% productivity gr. to match our 8% debt gr.?

Mark

A very interesting Economic Focus column appeared in the latest edition of The Economist, titled Is Price Stability Enough? (subscription required)

The Economist has been concerned about asset bubbles for quite some time - even putting a falling brick on the cover to denote the bursting of the world-wide housing bubble - and has been very critical of the easy credit policy of the Fed in promoting these bubbles. Contrast it with Alan Greenspan’s formulation: a bubble cannot be identified until its bursting confirms its existence and it is better to clean up the mess after the bubble bursts with liberal doses of ultra-cheap credit.

The Economist article quotes the Chief Economist of the Bank of International Settlements, who takes an explicitly Austrian School view point, and argues that the low reported consumer price inflation, arising from the positive supply shock of China and India, has lulled the central bankers into running a very loose monetary policy. Instead of stoking goods price inflation, this extra money and credit has gone into asset markets world-wide, and more recently commodities markets. Without that faulty monetary policy, the world would have experienced benign, mild deflation, as has happened several times in the 19th century. America would not have run the extreme trade deficists it has been running and the housing bubble need not have happened. Unlike the bad deflation that comes after asset bubbles, supply expansions cause good deflation. After all, hasn’t the world benefited from falling prices of technology goods for decades, while the technology industry has prospered?

Austrian school proponents have said this for years, and yet mainstream economists have completely ignored them or worse. Paul Krugman calls the Austrians “liquidationists”, which only shows his intellectual arrogance coupled with ignorance of what the Austrian school is really about. After all, Krugman (along with Larry Kudlow) was calling on the Fed to pause its baby-step interest rate increases as early as fall of 2004, when the Fed had barely started it. Of course the Fed continued raising rates, and we still got the massive housing bubble in 2005, and a commodities boom. I hope Krugman-types never gets anywhere near power over the money supply - but wait a minute, isn’t Ben Bernanke exactly that?

Ben “Helicopter” Bernanke has sworn to fight even the remotest possibility of deflation and has all but guaranteed easy money for ever. Gold price has taken due note of the Bernanke guarantee. This is not going to end well - be very afraid.

I am a Paul Graham fan [though I have to say I am not much of a Lisp fan]. He has amazing insights, and even when I disagree with him, I find them valuable. His latest essay The Hardest Lessons for Start-ups to Learn is his best. The lessons are applicable for start-ups or new products. Coming from a company that ships a lot of products, I can personally identify with these lessons.

There is a lot of good advice in that essay. Perhaps my favorite is:

This is not just a start-up founder quality. It is the quality needed to succeed in any field in the real world. Just as in his case, I found this through experience and the lesson came as a surprise. I have had the misfortune of being ridiculously over-educated, spending many precious years of my youth in getting a PhD when the real world would have been the better teacher.

And along with fancy degrees came IQ worship, which is actually more damaging than the years wasted in school. Fortunately, real world taught me that success if far more than an IQ score. That is perhaps the most important lesson I have learnt in AdventNet.

That leads me to the one key area of disagreement I have with Paul: Lisp. Lisp is IQ worship distilled into language form. I can point to any number of highly productive, creative software engineers who will never make the cut if mastery of Lisp were required of them.

Here is a NY Times article Revival in Japan Brings Widening of Economic Gap and that has a nice chart that shows just what a decade of ultra-low interest rates and ultra-cheap money has done.

Keynesians like Paul Krugman have given the usual “Print Lotsa Money” advice to Japan, which the Japanese mostly adopted. The zero interest rate policy was adopted to fight deflation, but the reason the deflation happened was the monster bubble of the 1980s in Japan (remember how the Imperial Gardens in Tokyo were supposed to be “worth” more than all the land in California?) So instead of letting the bad investments of the bubble get cleaned up, Japan chose the path of propping up and bailing out zombie companies. In the process, the government debt in Japan has reached “world-class” levels. Japan faced the ignominy of its debt being rated lower than Botswana’s.

The chart above shows one consequence of this. A substantial segment of the population say they have no savings for retirement. In a rapidly aging society, with a heaviliy indebted government, this is not a good thing.

But Japan has one thing going for it that most western countries don’t. As the NY Times articles puts it, in a somewhat negative tone:

This is consistent with most Asian societies, and I think of it as a good thing, while NY Times reports as if this were a problem. Here lies a potential solution to the problem of an aging population, without bankrupting the government; children take care of their parents post-retirement, oh, what a quaint notion. In fact, it is not some uniquely Asian phenonmenon - government social security programs have broken that inter-generational bond in the West, so much so that the practice itself looks quaint to NY Times. I hope Asia doesn’t blindly emulate the West in this.

NY Times had a story The Economics of Henry Ford May Be Passé where they provide the chart below that shows how average hourly wages for workers who are in the bottom 80% of income have stagnated in the last 30 or so years, after going up steadily for decades.

Nixon abandoned the convertibility of US dollar to gold in 1971, which matches pretty well with the stagnation seen in that graph. I am sure mainstream economists will have their complicated explanations, including rising oil prices, globalization, what have you. And I am sure gold is a barbarous relic that has nothing do with stagnating wages. After all, their equations work perfectly with any form of money, including money made from thin air. Except that in the real world, abandoning gold has had consequences. To repeat myself, the road to hell may be paved with good intentions, but it is usually paved by macro-economists.

They say it’s hard being from the state of Tamil Nadu and not concerned about politics…atleast during the elections ! Well, it is true personally speaking. I can’t comment abt inflation, currency devaluation that you discussed (but very interested to know more) but one thing is certain: the goodies have been announced by all parties. I’m not quite sure if “most voters are pretty sharp and well informed about these matters these days ” and if “these promises tend to be kept”. I have my doubts. But you are right, pages have been devoted in all the dailies - even in the Bangalore based ones - on the various competing promises (and mostly as to how ridiculous the claims are). What pained me was someone like the federal Finance Minister backing it and when you see the guy making statements - given his credibility and standing on the general Indian economy - you tend to think “who is the one really speaking the truth ?”. Oh well. But then how many elections are based on sound logic…..?

Wolfram states in his Principle of Computational Equivalence

I believe Wolfram’s book A New Kind of Science contains profound insights, in spite of the fact that the author repeatedly hits you on the head with how profound his insights are.

The basic premise is that every real world system is equivalent to a computer program. One corollary to Wolfram’s principle, which he also talks about in his book, is that most problems arising in nature are formally undecidable. Think of real world questions like “Is this face is beautiful?” or “Will this product succeed in the marketplace?” I believe most such questions are formally undecidable, meaning there is no deterministic computer program that can provide correct answers all the time. The issue is not simply the imprecise nature of the definition of words like “beautiful” or “succeed”. Even if precise definitions can be made, the problems will remain undecidable. The key reason is self-reference: at some level, the definition of beauty can only be made against a definition of “normal” or “plain” or “ugly”, which basically means beauty will refer to itself.

Isn’t there a contradiction here? We say real world systems are equivalent to computer programs, but we also say that no computer programs can exist to give always correct answers to questions? There is no contradiction. The real world system is equivalent to a computer program, but no computer program exists to give an always correct answer about that real-world-equivalent-computer-program. To put it differently, the only way to get answers about the real world is to run the real-world-equivalent-computer-program i.e experience life itself! Wolfram points out the triump of experimental science (just run the experiment, don’t just sit and theorize) this corollary implies.

The always-correct part above is important. It is possible to develop programs that give mostly-correct answers. For example, a face recognition program, like the one developed by Riya could aim to provide mostly correct answer to “Is this face beautiful”, under commonly accepted notions of beauty. The program will make occasional errors, but as long as the errors it makes are similar to the errors humans make, it is OK. The program will pass the Turing Test in mimicking a human being in the judgements it makes.

I have found Wolfram’s Principle and the corollary of formal undecidability very useful. A lot of times, arguments and debates and flame wars we get into are really about formally undecidable questions. Questions like “Is Lisp better than Java” fall in that category - in this case, the self-reference is obvious because both are Turing complete, and so both Lisp and Java can be used to mimic the other. So we have to resort to statistical algorithms to decide it, which means, for example, we select a set of representative programs to code, select a set of representative programmers, select some metrics, and then find results. The only problem, of course, is that every step above will be contested (what is a set of representative programs to code? what is a set of representative programmers?)

The search engine ranking problem is formally undecidable too. The self-reference and feedback looks (ever heard of SEO?) are obvious.

Statistical algorithms, like the ones search engines use, seem like the right answer. But we must never confuse almost-correct with always-correct. This is OK for search engines, but in real life, a lot of insights could be hidden in that gap between almost-correct and always-correct. More on that in a future post.

PS: If it feels I am on a spree of documenting the uncomputable, the undecidable and the unmeasurable, I plead guilty as charged.

All the heat and noise over the delay of Windows Vista reinforces one thing I have come to believe: software project schedules are uncomputable (more on this technical terminology below). It is foolish to be going around announcing dates years in advance. I have no idea how project managers in Microsoft can ever precisely predict a delay of a few weeks several months in advance. We have taken our lumps when things got delayed [OK, we don’t have complex multi-year schedules, and frankly, I wouldn’t know how to create one!], and what we learnt was to be very careful promising release dates. I posted on this before at Scale Invariant Slips in Software Release Dates.

I believe the problem is fundamental and theoretical. I alluded to this earlier when I used the word “scale invariance”. Basically, the problem is that the job of creating a project schedule from a given set of requirements is an uncomputable function. The everyday meaning of the term “uncomputable” is that there is no step-by-step, determistic algorithmic process that can guide you in effort estimating the project. The human project manager is basically doing a whole lot of guess work. Let me elaborate.

Consider the situation in a well-understood project management activity like building a house. In building a house, it is possible to precisely spell out every step in the process. In effect, the project manager has created a “program” i.e schedule detailing the steps in the process. In a few years, it is possible that this schedule could be fed to an automated robotic construction system which builds the actual house. What is required is to estimate how long it takes to run the schedule, assuming human or robot workers carrying out the various steps of the schedule. We now have to make a crucial assumption: the schedule has no loops, no go tos and no recursions, so estimating how long each step would take should be possible, so the entire building schedule could be estimated. What is the meaning of not having no loops, no gotos and no recursions? Basically the building construction schedule is a linear workflow, where an activitiy sequentially succeeds another. Branches are possible, but no looping is allowed.

It is obvious why we need to no while loops, no recursion, no gotos condition: the effort estimation problem is impossible with these constructs, due to the famous halting problem. If any significant innovation is required in building a particular house, these conditions will likely be violated, and effort estimation again becomes uncomputable. This is where software project scheduling comes in. In order to effort estimate a project, the project manager is in effect constructing a “schedule program” detailing how the software will be built, based on the given requirements. But unlike in the building example, it is rarely reasonable to assume that the schedule program will have no while loops, no recursions or no go tos. In fact, a trivial example of a while loop is the bug-fixing loop: while (bug_exists) {//fix it} and that is unavoidable in any software project.

Any reasonably complex software schedule will have loops. If the high level schedule for a complex software project does not contain loops [the “pointy haired boss schedule”], then it is likely that some box in that schedule itself does. In effect, what the higher level schedule would have done is to specify “Build this module in 3 months”, without specifying the schedule for the module in question, and it may turn out that the module is itself not estimatable.

Given that the schedule program has loops, the time it takes to run the schedule program [i.e the time it takes to build the software according to the requirements] is not predictable in advance. The only way to effort estimate such a schedule is to actually run the project and see how long it takes. Doesn’t it feel like this is what Microsoft is effectively doing - just “run the project and see what happens?” The only part they seem to be doing wrong is to announce their estimates of when the project will end.

Now coming to scale invariance. Scale invariance is basically a recursive process. As soon as you have recursion (or equivalently while loops or gotos) in your program, you cannot algorithmically guarantee runtime behavior. My contention is that software project schedules have a lot of recursion in them.

Isn’t this a cop out? What are project managers paid for, if they cannot estimate and stick to schedules? That is a subversive question - I will take that up another day.

There were two articles in NY Times in the last 2 days that caught my attention. The first is an Op-Ed To All the Girls I’ve Rejected by Jennifer Delahunty Britz, the Dean of Admissions in Kenyon College. The basic thrust is that there is now a disproportionate number of female applicants who are more qualified. If colleges strictly admitted students based on objective criteria like grades, SAT scores and recommendations, they would end up admitting many more women than men. Here is quote (emphasis mine):

And here is a story on the psychotic effects of drugs like Ritalin, widely prescribed for treating attention deficit disorder & hyperactivity in young kids, disproportionately boys. The news story Panel Advises Disclosure of Drugs’ Psychotic Effects is not really about AD/HD or boys at all, but it tangentially reports that (emphasis mine):

So we need to medicate 10% of boys aged 10-12 so they can attend school normally. I am pretty sure there a connection would be dismissed, but could it be possible that the college admission numbers reported could have something to do with such extensive medication needed in boys at an earlier age?

It is worth drawing the connection to the fact that boys suffer from autism at rates 4 or 5 times greater than girls. I don’t know the ratio of boys to girls in AD-HD but I wouldn’t be surprised if it is at least 2 to 1. Now, here are my questions.

1. Clearly the number of children diagnosed with AD-HD, prescribed stimulants like Ritalin, has increased massively in the last few decades. Could all this increase be pegged to “better diagnosis”? Kids with AD-HD are very difficult to teach in school, because they are disruptive. Did teachers put up with disruptive kids before, and now they don’t? Particularly in an age when “discipline” in kids was more valued than it is now?

2. Could the rise in AD-HD have anything do with the decline in qualified male applicants to colleges?

3. What could cause the increase in AD-HD in boys?

Let me offer some speculation [no claim to originality made]: there are some things that have changed in the last 25 years. One is that the rising levels and the rising number of vaccinations given to kids. Yes, I know, quack theory, fed by frustrated parents. I just took a look at the vaccination schedules for my new-born niece in India, and there were no less than 14 separate shots in the chart, starting on day 1 of her life. 30 years ago, kids were probably given 3 or 4 shots in total, starting much later.

The hypothesis [to many of us parents of kids with autism, it is getting closer to being proved] that many of us are working under is that there is a connection between the dramatic increase in vaccinations, the associated overall rising levels of toxic exposure in children, and disorders like autism and AD-HD. It is by now clear that boys are the weaker sex - they are disproportionately affected by environmental assaults.

The medical establishment insists that vaccinations are perfectly safe. But are there any long term behavioral consequences? I am sure they will dismiss any such connections like the ones drawn above. I am not against vaccination per se. I was lucky to survive Diphtheria as a kid, which has killed millions and millions around the world, and still kills. I know many people in my age group in India afflicted with polio. But it is still worth asking Are we going too far? Are we being too aggressive with vaccinations?

I hope the medical establishment would at least start to investigate these connections. The numbers are staggering.