Thursday, January 15, 2015

Artificially engineered jumps of currency exchange rates are uncivilized

...they hurt financial planning, create easy profits and easy losses...

In Fall 2011, the €1 euro was worth CHF 1.2 Swiss francs and the franc had the tendency to climb further towards parity. The Swiss Central Bank decided to protect its domestic importers and pegged the currency to the euro. For 15 months or so, the euro was worth CHF 1.2.

Leonhard Euler (not Gauss, LOL, thanks) only appeared in the seventh series of the banknotes, one printed in 1984. The current eighth one, printed in 1995, contains no mathematician or scientist whom I can recognize. Am I overlooking someone?

Some lucky-yet-realistic folks must have known that the peg wouldn't last forever. They bought lots of francs – or shorted the euro against the franc. They waited – and they were vindicated today. The peg was abolished, the Swiss franc jumped over 15 percent within minutes. Due to some instability, the CHFEUR exchange rate was up to 30 percent stronger than yesterday at some moments.

In similar circumstances, people who have the "right currency" benefit a lot and quickly – and those who have the "wrong currency" lose. It's wrong for numerous reasons.

First of all, there is always a potential for foul play. The central bankers knew in advance what would happen today. Even if they can't easily abuse their position, they can tell their friends who make the profit and this profit may partly get back to the bankers. I am not able to prove the accusation against any particular banker and her pals but I would be shocked if such things weren't occurring. It's OK to respect presumption of innocence while dealing with individual people and their possible acts in the past but it's very unwise to design policies that assume that people will act as saints in the future.

Second, if we assume that no one has the insider information, these jumps act as a form of a "mandatory lottery". Whether you like it or not, your choice of currencies in your savings, mortgages, and contracts affects your fate. Lotteries may be fun but mandatory lotteries are harmful because they effectively force people to reserve some extra resources for similar events that may turn against them.

Don't get me wrong. Of course that I think that it was right that the peg was removed today. What was wrong was the peg itself. But even the way how the peg was removed was wrong. They should have designed a more complex way to fix the exchange rate that doesn't admit any "totally easy and safe profit". For example, a random walk connecting 1.2 and 1.03 should have been computed by a random generator as the preplanned evolution for the next month, and they should have enforced this exchange rate as a function of time, announcing that they would be gradually allowing the currency to strengthen again.

The Czech National Bank has been a player in weird and dirty games meant to devalue the local currency, too. On the anniversary of the Great October Socialist Revolution, on 7th November, 2013, they did something similar as their comrade Vladimir Lenin. They announced that they are no longer able to guarantee the inflation target 1-3 percent by adjusting the interest rates (which are basically zero) and they need to weaken the crown by playing with the exchange rates. For years, the crown would be rather stable relatively to the euro but it was instantly weakened by 6 percent or so. Due to the strengthening U.S. dollar, the crown would lose over 20 percent relatively to the dollar since November 2013.

But the euro-crown exchange rate was standing close to 27.7 for most of the year 2014. Last week, the crown weakened again, to 28.4, after new inflation data showed that the inflation was still zero or so, increasing the risk that the madmen at the Czech National Bank will move their arbitrary target again and print the crown and buy the euros to push crown towards 29 per euro or something like that.

Because the market was well aware of the symptoms of the psychiatric disease of our central bankers, it immediately decided that the price of the euro should go closer to 29 as soon as possible.

If you realize how devastating and seemingly unstoppable the fall of the Russian rouble was weeks ago, you should agree that this decline of the domestic currency is by far the most serious threat that a country whose currency doesn't enjoy the status of a major world currency is facing. You know, a central bank may always weaken its own currency. It may print it in an unlimited amount and sell lots of it to the market. But it's much harder to strengthen your currency. Beyond a certain point, you may very well run out of your foreign currency reserves! And this outcome becomes more likely if you have previously worked to undermine the currency's trustworthiness.

Most of the drop from 27.7 to 28.4 was undone yesterday, after President Zeman verbally intervened and criticized the Czech National Bank for these exercises, saying that they should stop. Crown returned to 27.9 or so per euro today, less than a percent weaker than when it was a month ago (and many previous months). According to the constitution and the Bill on the Czech National Bank, the words of the president may matter because these documents assert that the president appoints and fires the members of the ČNB banking board. While the central bank is "independent", it's not "quite" independent, you know, and the central bankers could be afraid of their being fired.

Meanwhile, the Czech National Bank replied that they haven't intervened against the crown for a very long time. They have simply trained the market to get used to the new value around 28 per euro. The intervention-free exchange rate would be about 25 per euro and I think that according to some sustainable objective benchmarks, even that rate was exaggerated and the euro could "fairly" be just 20 crowns if not less.

So it is rather unlikely that the Czech National Bank will escalate its distortion of the exchange rate. Not only they may be afraid of the president's powers. The Czech economy returned to the growth, about 2%, so one may argue that the interventions are no longer needed. At least, that was the logic that canceled the peg in Switzerland today.

What ČNB exactly targets

They want to keep the inflation rate – based on some basket of common enough products – near 2%. My understanding is that they really care about the core inflation, one that removes the volatile food and energy prices from the basket. At least, a few years ago when the food and energy were getting more expensive, they would say that this part of inflation didn't matter. Now, so far, they seem to be consistent and argue that the dropping prices of oil, gasoline, and perhaps food are no reasons to be concerned (about deflation).

Despite this good sign, I find it obvious that in the long run, the bank overshoots its declared inflation target. The inflation was 4% several times and they would say that it didn't matter because some of it could have been attributed to the increase of the value-added-tax or something like that which was a one-time event.

This is a highly problematic excuse. While it's true that the increase of the tax shouldn't be expected to be repeated next year and every other year, I don't think that it should be fully subtracted and ignored, either. The increase of the tax was very likely to be "irreversible" for quite some time so one shouldn't treat it in the same way as the volatile food prices.

The point is that the bank should protect the long-term predictability of the value of the currency – how much a citizen will be able to buy for X crowns in the year Y. The increase of the prices due to a higher tax is just another increase of the prices affecting this planning and shouldn't get an exemption.

Five years ago or so, I would have a private lunch with Mojmír Hampl, now (and then) a vice-governor of the Czech National Bank. We met because we agreed about some libertarian principles in the international economics or something like that. Some of the discussions would be about the right way to target inflation. At that time, he looked reasonable but because of the events that happened in November 2013 and the way how the ČNB board defended it, I no longer think he is reasonable.

I think that he is blinded by some technicalities (like whether cars or houses should be in the basket) and fails to understand why it is actually a good idea to have a target.

Again, targeting is a good idea because it allows the users of the currency to financially plan – to imagine what their savings or loans will be worth in the future. There are many baskets one may use for targeting. One may also target the nominal GDP – to make it grow by 4 percent every year, for example. There are many different options. One has some experience what the prices of a basket or the GDP were doing and one may extrapolate some ideas about the future value, too.

But the key rule is that one must stick to these conditions and be consistent about them.

From the viewpoint of the monetary expectations, a one-time increase of prices due to some increase of a tax or something like that is a self-evident violation of the predictability. It is a clear mistake in the planning and targeting. Even more seriously, an artificially engineered jump in the currency exchange rate is absolutely harmful.

If you weaken your currency by 6 percent relatively to everyone else (and only our crazy bankers did such a 1953-style thing, not the Swiss ones, to be sure), it means that even short-term planning becomes harder. Exporters – the employers – benefit. But the importers, travel agencies, and especially employees lose. Czechia is already close enough to the bottom of the purchasing power in the EU. And of course, competing producers in adjacent countries lose and have a good reason to be upset, too. (For example, owners of Slovak hotels have lost lots of Czech tourists due to the weakened Czech crown – Slovakia uses the euro.) One may talk about the right balance between the interests of all these folks. And of course, the right balance is dictated by the free markets, not by intervening banks.

I think that even the Chinese officials have largely understood these things. One may increase the overall GDP figures by artificially weakening the yuan but the Chinese workers will be able to buy less foreign products for their income – which is why the higher GDP won't directly translate to a "good thing". Increasing GDP by these mindless interventions means that you have forgotten what the quantities mean and failed to realize that only the undistorted GDP, and not a distorted one, may be linked to the well-being of the people. Too bad that our "seemingly libertarian" central bankers haven't gotten these points yet. Time to learn how to think in a more pro-market way from the Chinese, Gentlemen!

At the end, I think that in a healthy world, the currency exchange rates would be pretty much the right numbers that bring a balanced current account or zero trade surplus/deficit to each country (each currency area). Roughly speaking. Now, I can agree that the right expectation shouldn't be "zero" but a "different constant" in various special situations. For example, a country with a currency used as the main world reserve currency may afford some trade deficits. At the end, I think that this imbalance is counterproductive for the world and it would be good for the world to get rid of this special role played by the American currency – and therefore America – but this distortion isn't a real game-changer.

If you forget about details, things are simple. Countries may have different currencies. Their exchange rates are adjusted so that the trade of each country is balanced. (I don't want to discuss too carefully whether it's better to expect the trade balance or the current account to be zero. I actually think that the trade balance is better. For example, when German companies get their Czech crowns as dividends from their Czech daughters, and these dividends only reduce the current account, not the trade balance, that should lead to the increased usage of the Czech crowns outside Czechia, and should therefore not be considered on par with the potential trade deficits.)

To conclude, I think that it's right for central banks to have targets and some quantities may be better for targeting than those that are used today. But I think that a civilized management should avoid discontinuous jumps in the currency exchange rates – and perhaps avoid discontinuous jumps of the rate of the previous quantity and/or discontinuous jumps in the exchange rates.

In my opinion, this condition of continuity is much more important than a modern choice of the basket (or nominal GDP) used for the targeting. Whatever the exact rules of the game (e.g. the inflation basket and target) are, the market is able to adapt to these rules of the game. However, one-time violations and discontinuities always create havoc – they're a form of earthquakes. And a sequence of earthquakes – one-time violations of the rules of the game – that affect the prices and rates in the same direction have an increased damaging power.

Civilized currency exchange rates are basically continuous functions of time that are determined by the free markets and if central banks do something about these features, they should make them even more continuous, not less so!

Also, central banks shouldn't be panicking about one year or two years of zero inflation – or very mild deflation. The idea that people will postpone their consumption (e.g. the dinner?) for a year is preposterous. Most things people are buying are to be "consumed" in a rather short time scale and people need to "consume" them soon, so whether they will be cheaper next year is completely irrelevant. It's simply not true that deflation of any kind is always harmful.

The central bank was "generous" when the inflation rate was around 4 percent several times in recent years. So I would expect the same generosity when the inflation is low. But if they're so obsessed about the bogeyman of (tiny) deflation, they should still prefer more gradual tools. Even negative benchmark interest rates could be healthier than interventions to the currency exchange rates.


  1. For those here who criticize million friedman, a defender of freedom choice and sensible economic policies, this is a good time toremember that one issue that friedman returned to again and again throughout his career was the need for governments to engage in predictable monetary policy, something that wasnt done here.
    So, the little people lose again, surprised?

  2. The Australian dollar has dropped 15% since August. That is painful to me personally. In 2 years time I will profit (if the exchange rate stays the same) and I sell my chinese property and convert to Australian dollars.
    I just take it as the vagaries of exchange rates. Sometimes you win, sometimes you lose. I'm sure there are insiders who make a fortune along the way.
    I'm not sure I understand about what the chinese are doing with their currency. As far as I am aware, it is linked to the US dollar. Yes, there is movement between them but only by fractions of a percent.
    After the US caused meltdown in 2008 it didn't worry the chinese too much about a loss of export markets (that is what they gear production to). They have an untapped domestic market that they exploited. They gave subsidies to the poorer people to buy appliances like fridges, washing machines etc.. Kept the factories going so it didn't hurt the economy too much and also raised living standards for many.
    I'm not saying China is right in everything she does. They do make the right moves domestically at times.

  3. China is a semi-capitalist country. In the US we keep political corruption under control (you can never eliminate it) through a combination of a free press and democracy. China has neither and is thus forced to clean house by fiat. This requires one individual person to amass enough political power to force out almost a whole generation of functionaries.
    Deng was able to do this and initiate free markets thus saving China from disaster.
    It is happening again in the hope that new reforms will enable enough stability and continued growth to preserve domestic tranquility. his will be required again in a couple of decades.
    Eventually the lack of openness will keep China from fully enjoying the potential benefits of a truly free market.

  4. The US government did send the Cookie Monster.

  5. "Why is it that we should tell individuals what they can and can't do
    with their bodies even when they do not violate the rights of anyone

    Islamism is hardly limited to the idea of individuals minding their own business.

  6. "There is no mistake. The drone operator knows that there are kids in
    the wedding party but he is told that there may be a high value target
    that has to be taken out. He takes the shot knowing that he will kill
    plenty of innocent people."

    Yep, that's collateral damage. Basically, you can't indiscriminately kill civilians. Firebombing Dresden would no longer be allowed. Bombing a wedding party in Dresden that was attended by a high-ranking official would be allowed.

  7. You certainly shouldn't invade Iran every time they stone an adulteress. But then, none of this has anything to do with the point of my post.

    You said, "I do not see the ancient writings to be reflective of the true beliefs and behaviors of most Muslims," and I gave you an example that this statement is nonsense. Nothing about any invasions there.

  8. I would not be too shy about accusing bankers - there is a video about 'money masters' or something which detailed how they created huge depressions in the 19th century by withdrawing money from circulation, - and also that the Wizard of Oz was a 'pro-silver' and 'anti-gold' tale. In the book, Dorothy had silver slippers.
    also when banks went belly up in the thirties - the owners would make out big checks to each other before they folded.

  9. "I am sorry my friend but we saw the allies hang Nazis who never violated German law and simply obeyed order."

    The Geneva accords are international law, while your analogy deals with German domestic laws during WWII. Apples and oranges.

  10. That would be Leonhard Euler

  11. The problem was that Milton Friedman supported giving central banks a monopoly on the creation of money and supported central planning by the Fed and its counterparts. His call for a steady loss of purchasing power by a constant expansion of credit could not be justified and would only limit the transfer or wealth from the working public and savers to the financial system and its clients but would not eliminate it.

    What we really need is a free market in money. That way the central banks cannot manipulate interest rates and could not rob us of purchasing power as we would have the option of using something other than their counterfeit 'bank notes' as money.

    The Swiss bankers did what they knew had to be done before they wiped out a system that had been sound for hundreds of years. In fact, I would say that they were too timid because before they took this action they spent a great deal of time and effort fighting the referendum that would have it repatriate Swiss gold by withdrawing it from New York and London, where it is used to manipulate the price of bullion.

    The way I see it the SNB has sent a signal that it believes that the market needs to let the business cycle run its course so that inflation expectations can get under control. Its previous move had helped to create a massive real estate bubble that threatened to take Switzerland the way of Japan. Better to correct the errors by letting the markets set the price and value of money than to manipulate the markets in the hope that a few men making decisions behind closed doors are more capable and better informed than millions of producers and consumers discovering prices through open market transactions.

  12. "Artificially engineered jumps of currency exchange rates are uncivilized

    ...they hurt financial planning, create easy profits and easy losses..."

    Sorry my friend but it is the manipulation of markets that hurt planning and create easy profit opportunities to those that are able to take advantage of the growing liquidity. You of all people should understand the folly of central planning. Why is it that it is not OK to try to plan national car or real estate markets but perfectly acceptable to manipulate the value of the currency? And how do you end the process once you have begun and all that manipulation has taken current conditions very far from equilibrium?

    You are probably the person with the greatest intellectual horsepower on this board. Why not use some of that power to think things trough beginning with sound first principles?

  13. the clarity you apply to islam is evident in your post above.
    Perhaps you should read about the United Staes experience with having a myriad of currencies, or maybe, just maybe. avail yourself of the the total history of humankind?
    I will accept that our views differ on this.
    You should as well.

  14. My point still stands. Most Muslims want nothing to do with genital mutilation or stoning of adulterers, particularly those that live in the West and have been influenced by Western culture. When I first came to Canada we used to have some Italian father kill his daughter for having premarital sex and honour killings were common among a number of different nationalities. A few decades later second and third generation Italian girls are working as strippers without their fathers saying very much about it.

    You and people like you may mean well but are entirely on the wrong track. You think that the West is weaker than Islam and that people would choose a primitive religion over the secular world that you are used to. This is the same as people like Paul Samuelson being worried about the USSR because they believed that a centrally planned economy that was controlled by smart people (like himself) would outperform the 'market anarchy' (if only that were true) of the US. Samuelson was wrong just as you are wrong. The USSR had a terrible economy that could not keep up with that of the West and it eventually collapsed. Islam is no better than other religions and has its own problems. It will be changed and rejected by people just as teachings of Christianity were changed and rejected in the West.

    I don't know about you but I worry about my own freedom and from what I see the biggest threat to my freedom comes from my own government, not some fools hiding in caves or trying to overthrow Assad in Syria. I also see that the reason why al Qaeda and ISIS have become as strong as they are is because well meaning people like you thought that intervention in foreign countries was a good idea and decided that funding, training, and arming their fighters to fight common enemies was wise.

  15. Perhaps you should read about the United Staes experience with having a myriad of currencies, or maybe, just maybe. avail yourself of the the total history of humankind?

    A myriad of currencies? Sorry but you lost me. I think that you are confusing money, which is a given amount of some monetary commodity, with fiat currencies. If you care to explain I would be more than happy to look at what are citing.

    As for the history of mankind I think that it is quite clear that since the beginning silver (or gold) were chosen as a monetary medium because of their properties. Some societies, particularly poor ones used other available commodities like rice, wheat, tobacco, whiskey, beaver pelts, etc. Fiat currencies are a recent invention and tend not to last very long without experiencing very large losses in purchasing power. One thing is clear. Central planning and central banks are not very for ordinary people.

  16. equivocate all you want...I only note that you dont address some pretty fundamental aspects of islam...the subjugation of women, the fact that women' testimony isn't regarded as equal to that of a mens' testimony in islamic law... the whole concept of dhimmi, the abusive nature of islamic justice.

    Why am I supposed to send our military abroad to give Muslim women the same rights as women in Australia? And are women's rights on a stronger footing in largely Catholic Democratic Republic of the Congo?

    You seem to think that I have some progressive notion that you can eliminate all injustice in this world by passing a law or sending your military abroad. But I don't think that at all. With all of the race and gender issues in the US I think that Americans will make the world a better place by trying to have a bit more freedom at home first so that they can set an example to the rest of the world rather than just be seen as hypocrites.

    I would love to continue but have some business to attend to. I will cover your other points, if I have missed any later.

  17. If the currency can't fluctuate, people counting on any particular value-range ("planning" ... taking foreign-currency mortgages/bonds) are implicitly hoping that loss (caused by tension between market rates and pinned rates) would be socialized. That's not a very noble sort of position. In a way, I think it's healthy when such breaks happen, and people realize that foreign currencies are a risky investment, especially when the underlying economy/society is less-than-robust.

  18. "My point still stands. Most Muslims want nothing to do with genital
    mutilation or stoning of adulterers, particularly those that live in the
    West ...".

    A point can always stand if one keeps changing it. :) When I disputed your statement, "I do not see the ancient writings to be reflective of the true beliefs and behaviors of most Muslims," I wasn't thinking of the details (and does Koran even discuss genital mutilation?), but the general fact that the Muslim world is at present far more religious on average than the Western one. Furthermore, the recent trend in a number of Muslim countries has been towards greater not lesser religiosity. As part of that trend, some countries have even been practicing some of the harsher elements from "the ancient writings".

  19. You've gotta be right. That looks more like Euler to me. I never met him but I've seen samples from his family album. I suppose his being Swiss might have something to do with it too. :)

    Hmmm. Something clearly distracted Luboš. I wonder what? :)

    P.S. Gauss looks like the mother of a boyhood friend of mine. Every time I see his portrait I think of her.

  20. Why is a tax increase inflationary? If the government doesn't spend the money, the result is a decrease in total spending (nominal GDP), which would be deflationary. If the government spends the money, nominal GDP is unchanged -- so zero inflation.

  21. But neither is the West. The US has more people in jail than any other country, most of it for victimless crimes. Like the EU, the US regulates every aspect of their citizens' daily lives, censors speech, and spies on everyone. Yet we pretend that we are so perfect that we have to worry about women not driving due to some Islamic belief system by attacking countries like Syria, that are mostly secular even as we are silent about our friends, the Saudis and the Pakistanis or Christian countries where women's right violations are actually worse.

  22. That you have issues with women driving in saudi arabia, FOR WHATEVER reason, says a lot about you.

    from my perspective I would be happy if the lions of islam left our whores alone and continued to bang their own women.

    Who says that I have any issue with the traffic laws of any nation in which I do not reside? As I said my friend, I am not a progressive and accept the fact that there is a great deal of injustice in this world. I do not agree with our neoconservatives who want to fund permanent revolution abroad and to send our military to try to tell people in other nations what to do.
    My concern is primarily about liberty and I cannot see how we advance its cause by trying to justify the killing of innocent people because we fear their religion. Note that I have no problem projecting force against those that take up arms against us and are a direct thread. I simply do not accept the fact that killing 200 civilians for every one of the radicals can be written off as collateral damage.

  23. Yep, that's collateral damage. Basically, you can't indiscriminately kill civilians. Firebombing Dresden would no longer be allowed. Bombing a wedding party in Dresden that was attended by a high-ranking official would be allowed.

    Did you just justify the Pentagon attack? After all, there were high-ranking officials in the building so the death of the passengers and civilian employees could be justified according to your logic. Do you really want to go there or do you want to consider your position?

    And once you allow the killing of 20 kids and several hundred innocent adults because you suspect that some high ranking official who can be replaced in a day where do you stop?

  24. NO I just realize that you refuse to engage an argument on its clear terms....that you equivocate, rationalize and avoid dealing with concepts and realities that dont fit your narrative, thats all.
    I can only assume that the subjugation of women doesn't bother you...that the concept of the dhimmi is acceptable to you, that you have no issue with flooding people who dare to stay the truth in a place run by the house of saudi...
    thats all, youre an apologist for evil.
    that much is clear.

  25. You mean Carl Friedrich

  26. Yep, Oiler:

  27. Gradually, a meme about the banksters is gaining some foothold.

    Will Euros start raising pitchforks and preparing guillotines for banksters or Muzzies first, eh, heh, heh?

    Luckily, as Gene says, we have a free press here in the US, so I guess we'll be the last, plus we have lots of guns, so pitchforks and guillotines will probably be in less in use.

  28. OT, but Lubos might find this funny:

  29. Idiocracy is clearly not just an american construct.

  30. "You think that the West is weaker than Islam. ... The USSR had a terrible economy that could not keep up
    with that of the West and it eventually collapsed."

    The USSR was founded on a totalitarian ideology. Islamism is also a totalitarian ideology. The USSR eventually collapsed, but it had to be countered most vigorously to prevent its spread. Islamism must also be dealt with. The West has been in part ignoring the problem and in part dealing with it in the wrong way. It would be nice to see some progress on both counts.

  31. Large and confusing varieties of Bank Notes were a result of restrictions on branch banking, not free competition.

    As it happens varieties of bank notes were never a problem in Canada or Scotland when they had no central banks and banks free to issue notes.

    That would be, part of the whole history of humankind, yes?

  32. Utter crock.

    It would have rather astonished the Republican Baum to hear he had written a secret tract for bimetallism (a terrible idea if ever there was one) disguised as a children's book.

    The conspiracy theory of banks "withdrawing money from circulation" is also wrong. The financial crises in the United States during the 19th and very early twentieth century were products of government regulations. What tended to happen after the Civil War in particular was that banks were required to back their notes with particular types of government securities, so the stock of bank money varied directly with the size of the government's debt. All other notes were taxed out of existence. What happened wasn't that bankers "withdrew money from circulation." What happened was that the US government began to retire it's debt after the war, which shouldn't have caused any problems, if they hadn't regulatorily tied the money supply to the size of the debt.

    Moreover, the problem was that these note issue restrictions made it essentially impossible for banks to react properly to increased money demand during harvest season. Compare a plot of the stock of National Bank Notes in the US during the post civil war era with the Canadian stock of Bank Notes. The first thing that jumps out at you is that there are these nice little seasonal cycles in the Canadian Bank Note Stock, whereas the US stock is a monotonic U-shape. No annual variation at all.

    And guess what? You know how many Canadian Banks failed in the 1930's? Zero. So there were certainly no greedy bankers writing big checks to each other before they folded because they didn't fold at all. Now why was that? Well, Canada had no Central Bank, for one thing. They still had their more or less unrestricted note issue as well. I'm not sure where this last conspiracy theory comes from. But you'll notice that whatever problems the US banking system *actually* had, were products of the Government, not Greedy Bankers. Bankers don't suddenly become less greedy because the weather is colder.

  33. canonical quantizationJan 16, 2015, 4:50:00 AM

    Dear Lubos,

    Witten and Crnkovic have explained that the concepts of the canonical formalism are really covariant notions (phase space being the space of solutions, etc.)

    Has anyone given, based on this, a covariant description of canonical quantization? I.e. a canonical quantization that does not use equal-time commutators?

  34. That picture of Gauss looks remarkably like Euler.

  35. yeah...out of the entirety of humankind's history you pick Canada and Scotland...

    not China, not India, not the Mogul empire. Rome, ancient Greece...nah...exceptions to the rule exemplified by...Canada...Canada and Scotland.
    Because Canada was never a colony of Britain, and today, of course Canada has a multitude of currencies... as does Scotland today . Oh yeah, they dont.
    Out of all of history you choose country of 20 million or and an island that has been part of the UK for hundreds of years.
    Oh yeah, of course England is a place that started with privately issued notes, and for whatever reason decided that they didn't work so well. gee, I wonder whY?
    Canada. Scotland.
    Great examples
    Youre full of excreta.

  36. Sorry, Frank, but continuity of the rates in no way implies that a range is valid forever and it in no way implies that there is a tension between the declared rates and the market situation. On the contrary. *Almost all* the discontinuities are always due to the government's interventions in the markets. So you have it upside down.

    Foreign currencies are sometimes literally as "neutral" storage of value as the domestic one and shouldn't be called "investment". For example, 1/2 of Russians have savings in dollars, for example.

    Moreover, the very reason why it makes sense to talk about exchange rates is that the countries are not isolated from each other and for many people and companies, several currencies are comparably important.

    There is nothing "less-than-robust" about the Swiss economy, and indeed, the robustness of the Swiss economy was really the quoted reason why the peg was *not* needed anymore.

  37. LOL, Leonhard Gauss would be quite some hybrid! ;-) Thanks, fixed, although someone saw the mistake before you.

  38. Fixed, thanks! It was a really stupid megatypo.

  39. Sorry, I define inflation - and everyone who knows what he is talking about defines inflation - as the change of the price of a basket of products (or products and services), and this price (including the VAT tax - which is what most buyers care about) clearly did increase when the VAT tax was raised simply because the sellers had to transfer the extra expenses to the consumers.

    So whether the GDP changes or not is absolutely irrelevant for the question whether the tax increase was inflationary.

  40. Vangel, you must be completely illiterate if I have to avoid the term "imbecile". The whole article was against government's interventions and currency manipulations - and against central planning, too.

    The planning I talked about was self-evidently planning of private subjects, and I assure you that this takes place in capitalism all the time - in fact, it is much more important in capitalism than it is in communism.

  41. Dear Vangel, self-described "libertarians" like you only serve as a proof that the word "libertarian" in no way contradicts the term "hopeless moron".

    There was nothing imperfect about Milton Friedman's comments about those matters. A central bank that is obliged to make the value of a currency predictable represents the absolutely *smallest* influence that the government may arbitrarily exert in the monetary policy. It is the most pro-free-market choice. Every other choice, every other object or set of rules to define the currency gives more room to the government to distort things.

    All your optics is upside down.

  42. Hi, this question is either very hard or very easy but I don't understand it well enough to decide, or to answer it, for that matter.

    The two paragraphs seem to contradict one another. The most well-known Witten-Crnkovic paper

    is titled "Covariant description of canonical formalism in geometrical theories" so it either contains the answer to your question, or your question is logically self-contradictory because you want to claim that the canonical quantization means something else than what it does.

  43. canonical quantizationJan 16, 2015, 8:20:00 AM

    That paper only talks about the classical canonical formalism, not quantization.

    They say in the first paragraph of the paper, "Canonical quantization is usually interpreted as an approach that is not relativistically covariant, but this is not necessarily so"

    Then they go on to show how the classical canonical formalism can be developed in terms of covariant notions, for example, thinking of the phase space as the space of solutions to the equations of motion, rather than the space of P and Q at a particular time.

    However they do not discuss quantization.

  44. Dear John, I already wrote it twice but what distracted me was the clear memory of Gauss on the 10-Western-mark banknote

    One dead mathematician, another one, one dead currency, another one - 50% of the time I spent writing the name of the mathematician, I just conflated these two banknotes.

  45. There were lots of people making a profit off the residual fluctuations of EUR/CHF just above 1,20 by going long whenever the threshold was approached from above looking for a few pips of profit. This worked like a charm yielding very steady and predictable profits -- until yesterday.
    The problem is, to benefit from the tiny movements, a lot of leverage is needed. When the floor was removed, the violent price action wiped out such accounts in a spectacular fashion. A friend of mine in Singapore had about 70k SGD in his CFD trading account. He is now -356k SGD in the tank and the broker will likely sue him to make the account whole.
    Setting a stop loss at, say 1,1950 would have prevented the worst in many such cases. Though execution of stop losses is uncertain and can be subject to significant slippage. This depends a lot on the broker used. ECNs (providers of direct access to interbank liquidity for a commission) tended to execute stop losses fairly well. Prominent examples include Dukascopy, FXCM and IB. These brokers are all but guaranteed to sue for negative account balances when bad comes to worse.
    On the other end of the spectrum are so called "market makers" who don't usually bother to hedge individual positions of their clients (but rather make a macro hedge at best). A friend of a friend told me he's in the hole for -150k USD for the same reason described above with fxpro, a "market maker". They indicated they would forgive the nominal debt because they didn't actually incur the loss. If true, this guy is incredibly lucky and it's the first and only time I find a rational reason (in hindsight) to deal with a "market maker". It's not guaranteed, though, Oanda (another market maker) suspended trading for hours after the fact. I know people who couldn't unwind their positions until late last night, for a hefty loss of course.
    Personally had a minor long position with Dukascopy. Not having trust in the SNB (or any gov intervention), I had a tight stop loss in place @ 1,1980. Got filled at about 1,1940. 40 pips of slippage is usually terrible, but not this time around. I am *very* satisfied with this execution. Never guessed I would say this about a 40 pips slip :-)
    Morals of the story: Know your risk. *ALWAYS* use stop losses. Only deal with ECNs.

  46. "*Almost all* the discontinuities are always due to the government's interventions in the markets"

    I think we're in violent agreement on this part. Where we (may?) differ is that I prefer less (central bank/government) intervention, and you appear to prefer permanent intervention.

  47. not China, not India, not the Mogul empire. Rome, ancient Greece...nah...exceptions to the rule exemplified by...Canada...Canada and Scotland.

    I think that you are confused. The Chinese experiment with Fiat currency was an absolute disaster. Note that we could have mentioned Rome as well as it went from silver coins to coins that were basically made up of base metals. If you want more we could have used Sweden as an example as well. All fiat currencies have wound up losing most of their purchasing power quite rapidly. The US is no different since the USD has lost more than 85% of its purchasing power since 1971.

    There is nothing wrong with actual notes because they are backed up by specie and redeemable on demand. Governments don't like them because they impose discipline and make it hard for Kings or Prime Ministers to wage war.

    There is simply no historical data to support the idea that fiat currencies are better idea than hard money for ordinary people. The reason why the talking heads on the financial channels and the economists who are compensated by the Fed or big banks support fiat money is because they benefit from its existence and would get wiped out under a hard money system that does not permit them to rob savers and workers through the creation of purchasing power out of thin air.

  48. I imagine that the scrotum tightens in those moments

  49. Sorry, I define inflation - and everyone who knows what he is talking about defines inflation - as the change of the price of a basket of products (or products and services), and this price (including the VAT tax - which is what most buyers care about) clearly did increase when the VAT tax was raised simply because the sellers had to transfer the extra expenses to the consumers.

    When the term inflation was first applied to the issue of finance it simply meant the increase in the supply of money, not a change in the price of a manipulated basket of goods. Some people, who do know what they are talking about still see this as the legitimate definition and point out that by changing it you are no longer able to name the root cause of the business cycle. Note that it was the people who use this definition who saw the housing bubble even as Fed economists were saying that everything was great. It was those people who saw that the Fed created the tech bubble by its liquidity additions in the 1990s and are pointing to the sovereign debt bubbles that we see all over the world today.

    You were the smart guy who pointed out how useless the average annual temperature figure was because of the methodology of coming up with it. The CPI number is the same because not only is it artificial and cannot reflect the actual experience of any one consumer except by accident, but because accuracy is impossible. As proof I ask one simple question: what is the price of tomatoes today and is the price going up or down?
    Note that you can't answer the question properly because there is no one ideal tomato and because prices are location specific and effected by seasonal factors.

    Like temperatures, prices are local. Each one of us has our own specific basket of goods and services and they change as we change and our circumstance change. Using some aggregate number that is put together by people who are guessing, adjusting data, and have an incentive to have a bias is not very helpful to any of us. And arguing that there is no price inflation by ignoring what we pay for annuities as we head towards retirement or housing as we decide to settle down seems extremely foolish. Like the climate debate this one needs clear thinking and sound premises. I suggest that the promoters of fiat money have no clue what they are talking about and are deliberately ignoring history.

  50. I thought that you were the person who argued in favour of fiat money and central banks. You cannot support those and still be against central planning so I am suggesting that you go through your logic my friend.

    As I said before, your considerable intellect is not worth very much if your premises are wrong because no matter how sound and elaborate your logic you still wind up in the wrong place.

    This debate is ultimately about individual freedom, which is what all our political debates are about. I maintain that you cannot have liberty when a few men behind closed doors have a monopoly on the creation of money and credit because no matter what they do they are intervening and are moving the markets further and further from where they would be if competition were permitted.

    What you just saw will repeat over and over again as fiat currencies around the globe begin to collapse because prosperity cannot be built on a foundation of credit expansion and currency manipulation. Within a year or two you will see some major liquidity issues that will drive most currencies down and the price of gold in those currencies up.

  51. Im not confses...youre equivocating...the issue is a monopoly on currency...did the chinese ever countenance a multitude of entities issuing currency? no.
    Did the mogul empire? no
    did the roman empire? no.
    governments throughout time have taken that power for a lot of reasons, some good some bad.
    youre just dissembling and avoiding reality, the sum of human experience, and any other thing that you can't twist and cram to fit your narrative.
    Im done with this .

  52. You bet, it does. Things move your way, you feel invincible. They move against you, you feel you're drowning.
    Over time you learn to stay calm and keep feelings more neutral, regardless. It is still gut wrenching, at least for me.
    Very few events I am aware of, were as severe and devastating as yesterday. Any EURCHF trader will remember exactly where they were and what they were doing when it happened for the rest of their lives. And I don't think I'm exaggerating.
    The one other time I saw something like this was JPY right after the tsunami struck. That time I was on the right side of things by blind luck. Even so, I was shaken.

  53. I was talking about very specific market events, and there are many similar examples. All of them are specific interventions by governments or central banks, or their termination.

    What are *you* talking about? What is this "permanent intervention"? The existence of the money itself? It it is so, you are a hardcore hippie for questioning the idea of money because money is the main pillar of everything we call market economy in the modern sense.

  54. "What is this "permanent intervention"?"

    e.g., currency pegs.

  55. Right. All these highly leveraged bets on trading in a range are bets on the long-term stability of the regime, and you bet that the regime may fail. I think that he deserves the losses.

    Do you know someone else who ignored the tiny fluctuations and simply made a big leveraged bet on a future strengthening of the franc?

  56. Dear Vangel, various words have meant various things in the history but could you please use the words as their proper current meaning? Otherwise I refuse to read additional comments of yours.

  57. There is *zero* of central planning in the fiat money. I have explained this trivial fact to you about 5 times already.

    It may have been fun to chat with you at some moment but it is no longer fun, it is really obnoxious, so I banned you. I see no way that is more peaceful to save myself from the everyday experience of checking my own blog and being screamed at by complete idiots that I support central planning - something really insane because I am a hero of a sort in the fight against central planning.

  58. This article was *against* currency pegs. You surely must suffer from dyslexia.

  59. Perhaps ... but it sure sounded like you disapproved of the Swiss National Bank's relaxation of its peg.

  60. I wrote extremely clearly and explicitly that I find the abrupt way unfortunate. But that in no way means that I approved the peg. If you don't see that this implication would be invalid, ask your physician to check you.

  61. In terms of FX CFDs I don't, actually. Overheard someone claiming they "doubled their account" yesterday, but I have my doubts. CFDs simply aren't the right instrument to speculate on something that might or might not happen on the time scale of a few years. If nothing else, you pay carry (basically overnight interest on the leveraged amount) and remain fully exposed to a possible adverse price movement.

    I do know a guy who had some of these in his portfolio:

    That's very sweet, of course, but the size of the position was mediocre, unfortunately.

  62. OK then
    rather than the little guys in Canada.
    Does that fix it for you ?

  63. There was no Central Bank in the US between 1836 and 1913. There was also none in Canada until 1935 (not sure if they similarly had a Central Bank earlier in their history, but at least during the post Civil War period, they had none).

    There was no greed involved at all, except by the US Treasury during the Civil War, which set up the National Banking System to raise revenue for the war. The problem was it was never dismantled thereafter.

  64. I mentioned case I am most familiar with and most relevantly comparable to the US experience. But there actually was a Free Banking experience in China. As well as numerous other places. I suggest as recommened reading The Experience of Free Banking for *numerous* other examples:

    "Because Canada was never a colony of Britain"

    Irrelevant. The circulating media of Canada were Canadian Bank Notes, not Bank of England Notes.

    "and today, of course Canada has a multitude of currencies... as does Scotland today . Oh yeah, they dont."

    Actually, Scotland *does* still have note issuing banks today, although Scottish banking is no longer as free as it was before 1844. You can check out this website:

    And see pictures of the notes from various different banks.

    "Oh yeah, of course England is a place that started with privately issued
    notes, and for whatever reason decided that they didn't work so well.
    gee, I wonder why?"

    England never had free banking, only Scotland. But it's cute you assume that when the Government does something, must've had a Very Good Reason (TM).

    But one *doesn't* have to wonder why. Governments have always assumed control of money and banking for Fiscal reasons: the whole history of humankind is actually primarily marked by a record of Kings debasing the coin.

    "Youre full of excreta."

    You're rude in addition to being ignorant. Nice.