Prepare for the False and Misleading Denials

It is as predictable as clockwork.  Just as every horrific mass shooting is immediately followed by a rapid-fire chorus of declarations from the gun lobby that the unchecked proliferation of guns is not part of the problem, after every major hurricane, Americans are bombarded by hurricane-force denials that the event was caused by climate change.

Particularly after – or during – each weather disaster, professional climate change deniers are joined by others, including representatives of respectable news organizations, who look and sound like reasonable individuals as they patiently explain the complex atmospheric and water conditions that precipitated the latest calamity.  The apparent goal of these reasonable individuals is not to serve the cause of the deniers but to provide an in-depth look at exactly what happened in order to provide Americans with fact based information rather than politically-charged rhetoric.  Unfortunately, many of these analyses are based upon a misunderstanding that leads to a string of reasonable sounding but false, or at least deeply misleading, statements.

The misunderstanding that leads to eventual falsehoods begins with an innocuous question: “did climate change cause this hurricane (or drought, or fire season or other disaster)?”  Given that question, a conscientious scientist will inevitably respond with a statement along the lines of “we cannot directly link this weather event to climate change.”  While some reporters will report that answer verbatim, others will interpret and rephrase the answer so that it winds up as a headline declaring that “climate scientist declares that climate change is not behind hurricane Florence” or some other weather disaster.  Those headlines will be wrong, perhaps not maliciously wrong, but wrong nonetheless.  What lies at the heart of the rapid progression from reasonable scientific statement to misleading or false headlines is a recurrent miscommunication between the version of English used by scientists and mathematicians and every day English that is rooted in the use of statistics.

The misunderstanding arises because statistical methods can be used to very accurately describe the cumulative actions of a large group (of people, atoms, storms, or whatever) even when they may not understand the causal linkage and cannot predict the activity of any single individual inside that group.  The inability to accurately predict a single instance is often perceived by people who do not understand statistics as ‘proof’ that the entire statistical relationship is wrong or unproven.  That is a fundamental error.

The classic coin flip model helps to explain the difference between predicting long-term trends and predicting specific, individual results.  Anyone with basic familiarity with statistics can tell you with absolute certainty that if you flip a coin 1,000 times, there is a better than 99% chance that the coin will land with ‘heads’ up between 450 and 550 times.  Despite being able to predict the long term results of a marathon coin flipping session with great certainty, that same person would have absolutely no idea whether the next flip in the sequence will come up heads or tails.  Or, to be more precise, he or she will have the exact same 50-50 odds as any other random person in guessing the outcome of the next coin toss.  It does not matter if the toss came up heads ten times in a row, the odds of the next toss coming up heads is still exactly 50-50 and thus completely unknown.  (And, by the way, there is a 1 in 1024 chance of flipping heads ten times in a row, but knowing that does not change that fact that the 11th toss still has a perfect 50-50 chance of coming up heads.)

To expand the simple coin toss example to real life, think of the example provided by the tobacco industry.  Americans of a certain age will likely recall the heated debate in the 1950’s through 1970’s over the health impacts of smoking cigarettes.  For decades, professional deniers of the adverse health consequences of smoking would state that no one has ever proven that a single case of lung cancer was caused by smoking.  They would then shake their heads as they assured Americans that the medical science just wasn’t there on the risks of smoking.  To drive their point home, they would point to numerous individual cases of non-smokers who suffered lung cancer as well as other cases involving heavy smokers who lived to a ripe old age.

While their statements were so misleading as to have the impact of lies (and were eventually found to be such in courts of law), the deniers weren’t necessarily technically incorrect.  Even though by the 1960’s doctors knew beyond any doubt that people who smoked had a much higher rate of lung cancer than those who did not, there was never a perfect one-to-one relationship nor was the exact chemical and genetic mechanisms that lead to lung cancer precisely understood.  As a result, even though doctors could state with virtually 100% certainty that if Americans stopped smoking then thousands of lives would be saved each year, they could not look at an individual case of lung cancer and state with certainty the patient would not have contracted lung cancer if he/she did not smoke.  Thinking back to the coin toss example, doctors based their certainty on the health consequences of tobacco use on the results of tens of millions of “coin flips” in the form of known health results for Americans who either smoked or didn’t.

While the tide of both science and public opinion eventually turned against the tobacco companies, for decades many perfectly reasonable people, including many dedicated journalists, were seduced by the verbal sleight-of-hand employed by tobacco industry spokespersons whose rhetoric was designed to portray the lack of perfect medical certainty in a specific case as a lack of any medical certainty about the overall, society-wide impacts of smoking on health.  That’s a bit like saying that because a statistician cannot tell me whether the next flip of the coin will come up heads or tails then it stands to reason that the statistician cannot really tell me anything about how many ‘heads’ will come up as a result of 1,000 — or 100,000,000 — coin flips.  That was the lie that eventually led to the legal downfall of the deniers of the health risks of smoking.

Today, a very similar scenario is playing out with climate change.  Nearly all geophysical scientists in the USA and around the world agree that burning fossil fuels and other human activities that increase the concentration of greenhouse gasses in the atmosphere are leading to a rise in the average surface temperature of the earth.   They also (nearly) all agree that even though the net aggregate rise in temperature may sound small – just a few degrees – the rise will precipitate enormous changes in weather patterns.

Rather than the whole world warming up just a bit, climate change is playing out in very different ways in different places.  Rising temperatures are already inducing significant changes in established weather patterns, but even as some areas of the globe are already seeing fairly large increases in average annual average temperature, others are experience cooling.  As major ocean currents and jet streams change in response to rising temperatures, one very common result will be much more extreme weather, meaning that a small net increase in annual average temperature will be experienced as a combination of much colder winters combined with a much hotter summers.  Changes in cloud patterns also mean that established rainfall patterns are changing and will continue to do so.  Some areas are wetter than ever while others are caught in historic droughts.  Climate models can even predict which regions are likely to become drier and which wetter — but they still can’t predict the weather for next Tuesday or next month.  The models can, however, explain that hurricanes are packing more of a wallop because rising sea temperatures are causing more water to evaporate into the atmosphere.  As all of these changes unfold, there will be many, many more severe weather events, including both droughts, floods, hurricanes, hard freezes and heat waves.

Ultimately, however, all of this scientific certainty about what is happening due to climate change and what lies in store is based on predictions involving statistical averages.  Just as knowing the exact statistical probability of tossing a certain number of ‘heads’ in 1,000 coin tosses does not help in knowing whether a specific toss will come up heads or tails – or just as a doctor who is certain that smoking greatly increases the risk of lung cancer cannot say with certainty if a particular case of lung cancer was directly caused by lung cancer or if it might have happened anyway — knowing that human induced climate change is leading to many more, and much more severe, weather events still does not mean that climate scientists will be able to say whether any given storm is “caused” by climate change or would have happened anyway.

So, when you begin reading or hearing the inevitable reports that a renowned climate scientist states that hurricane Florence was not caused by climate change, take it with a huge grain of salt.  If you can find the actual original words and place them in the context of a conversation, you will almost certainly find that what the scientist actually said was something like “there is no way to say if hurricane Florence is a direct result of climate change” or even “climate change models did not predict this hurricane.”  Those are both reasonable statements but neither means that there is no relation between hurricane Florence and climate change.  A more in-depth conversation with virtually any geophysical scientist on earth would lead to the broader, and more policy-relevant observation that conditions created by a changing climate, including warming ocean surface temperatures, increased evaporation, and shifts in air and water currents all play a role in making destructive weather events such as hurricane Florence much more common.





Thoughts on the “Why” (rather than the “How”) of Cryptocurrencies

Reading media articles about Bitcoin and other cryptocurrencies left me frustrated because none of them directly addressed the real question that needs to be asked.  Yes, various articles are correct that Congress has no idea what blockchain is or what a cryptocurrency is.  Yes, other articles are correct that Bitcoin has emerged as a combination Ponzi scheme and money laundering tool.  Yes, cryptocurrencies are hard to comprehend because there appears to be (in Alice Walker’s words) “no there there.”  Against this backdrop of relatively uninformed speculation, there are articles in both financial and academic journals that clearly explain the potential of blockchain technology to create an entirely new type of currency – one that is beyond the control of any single government and which can be freely used by anyone and everyone as a unit of exchange as well as a reserve currency.  What I have not seen (outside some dense academic pieces) is an explanation of why anyone should care.  In other words, why should people around the world abandon their heavy dependence on the US dollar both as a unit of exchange and as a reserve currency in favor of some strange computer bits floating out in “the cloud” (whatever that is).

The potential economic advantage of cryptocurrencies lies in the promise of a genuinely global unit of both reserve and exchange that is no way dependent on the political or economic policies (or whims) of any one government.  Such a currency could facilitate world trade by providing a fair, impartially valued universal unit of exchange and.  It could provide a reserve currency that is not dependent on the economic fortunes of any one nation over which most holders of the currency have no control.  Because the value of a cryptocurrency is determined by global market forces, there is the potential, at least, for a cryptocurrency to become the only currency for which the value is managed by everyone.  While the benefits to many countries around the world are obvious, the emergence of a genuinely globally accepted world currency could also help the US by greatly strengthening the ability of the Federal Reserve to manage the dollar.  While there certainly are advantages to the USA of the US dollar (US$) being the world’s primary reserve currency and unit of exchange, there are downsides as well.  At present, the fact that well over half of all US currency is held outside the USA means that domestic policies implemented by the Fed are watered down.  Looking beyond physical (paper) currency, literally trillions of dollars are held as electronic balances in banks around the world – banks that are outside of the Federal Reserve’s purview.  Both multinational corporations and national governments may choose to trade in dollars for reasons that have nothing to do with, or are even diametrically opposed to, Federal Reserve policy goals.  It’s no wonder that some economists have joked that the Federal Reserve managing the dollar is a bit like the captain of a ship attempting to change course by dipping a teaspoon into the water.

While the Bretton Woods agreement remains the most commonly cited reason why the US Dollar is the leading international reserve currency, in reality the Bretton Woods agreement only explains how the US$ became the world’s primary reserve currency.  It does not explain why the US$ has remained the world’s de facto reserve currency and preferred unit of exchange for over half a century.  The most interesting — and often ignored – question is why the US$ has retained and even deepened its role in the immediate post-WWII world.

The first answer is that for most of the post-WWII era, the US had been kept a remarkably free exchange policy.  Nixon’s decision to (finally) break the formal tie between the dollar and gold represented a decision to keep dollar markets free rather than to limit them in the face of rent-seeking behavior by traders who profited off disparities in the dollar/gold exchange ratio.

Today, there are almost no limits on who can hold dollars, where they can be held, how they are exchanged, etc.  If someone (or corporation or national government) wants to exchange a billion dollars or even issue a billion (or 10 or 100 billion) in US$ bonds, there is nothing to prevent them from doing so.  They don’t even need to come to the USA or involve the USA in any way since dollar exchanges exist around the globe.  While the US$ is not completely uncontrolled, the controls that do exist are light and rarely implemented.  For example, persons carrying more than $10,000 in cash across the US border need to declare it, but there is absolutely no prohibition to transporting $1,000,000 or even $1,000,000,000 with absolutely no duties or taxes. The reporting requirement was implement as an anti-crime (primarily anti-money laundering) measure rather than to restrict the movement of dollars.

To understand how “hands-off” the US government has been toward the US$, remember that there are nations that use it as their national currency even though they have no “permission” or agreement from the US government to do so. They don’t have an agreement because they don’t need one.  There is absolutely nothing in US law to stop anyone from accumulating or using US$ for any purpose or in any location on earth.  For countries (such as Russia and much of the Foreign Soviet Union as well as others) that prefer to hold large quantities of actual paper money rather than electronic bank balances, the NY branch of the US Federal Reserve will even assist them in shipping billions of dollars in currency to wherever it is needed (which is why three-fourths of all paper currency in circulation is in the form of $100 bills).

The second answer to the question of why the US$ has remained the world’s most widely-used unit of exchange for so long is that there have been no real rivals.  While many touted the Euro as a potential rival, eventually the inherent weakness of a single currency that is effectively managed independently (and issued in bonds, etc.) by more than two dozen national banks and governments caught up with the currency.  Until and unless the EU can work out some basic and divisive issues regarding the rights of member states versus the European Central Bank, the fate of the Euro will remain uncertain.  The Japanese Yen was, at one time, thought of as a competitor to the dollar.  The reality is, however, that Japan’s national laws governing currency and exchange are not nearly as liberal as the USA’s.

Countries such as China and Russia sometimes promote their own currencies as units of exchange, but have thus far been unwilling to relinquish control over those currencies.  Anyone dealing in Roubles or Yuan is always at the mercy of Moscow and Beijing.  Exchanging a large quantity (or technically, a small quantity) of currency requires the permission of the government.  If one government or the other decides to declare a devaluation or to limit trading in order to support some national economic policy, there is no appeal.  Similarly, there is no recourse should one of the governments decide to demonetize certain paper bills, something Russia has done repeatedly.  For all its faults, the US government has never, in the post-WWII era, sought to control trading in its currency in the same way that other governments do.

Having cited the laissez-faire policy that the US government takes towards its currency many times, I must also admit that even the US policy is not without limits.  Sanctions on Russia, Iran, and North Korea all represent rare instances in which the US government has deviated from its overall policy of free and open exchange.  More importantly, the value of the US$ is managed (to the extent that management is possible) by the US Federal Reserve for the sole purpose of supporting the US economy.  While the Fed has a stellar reputation among world bankers and is not driven by foreign policy concerns when setting monetary policy, it nonetheless remains committed to the goal of supporting US economic growth.  No one outside the USA, not even other countries that use the US dollar as their currency, has any say in US monetary policy.

Cryptocurrencies hold the potential to break the linkage between a unit of exchange used by the whole world and a currency managed for the benefit of one country.  A theoretically ‘perfect’ cryptocurrency could represent a genuinely independent unit of exchange, the value of which is set by billions of market actors (people, corporations and governments) functioning independently around the world via free market transactions rather than by a group of economists (all of whom were appointed by politicians with often partisan agendas) meeting in DC once a quarter.

Thus far, the reality of cryptocurrencies has fallen fall short of perfect.  Bitcoin, the best known of all cryptocurrencies, made fundamental decisions early in its development that make it not only impossible for governments to control but also make it an ideal medium for money laundering and other criminal pursuits.  World governments – and most ordinary people – will not adopt Bitcoin as their primary reserve currency and unit of global exchange for the simple reason that Bitcoin has already been adopted by the criminal world.  I don’t mean to fault Bitcoin too much; they were among the pioneers.  Like many pioneers, they did not get it right on the first try.  The important point to remember is that the manifold weakness of Bitcoin are not inherent in the blockchain technology on which it and other cryptocurrencies are based.  Instead, Bitcoin’s problems can be traced to policy and marketing decisions that shaped the currency we see today.

If a cryptocurrency is ever to emerge as a genuine rival to the US$ as a unit of global exchange, it must combine the key trait of independence from any one government with the vitally important traits of transparency and accountability.   The simple yet hard to fathom reality is that blockchain technology, along with closely related technologies of distributed or “hyper” ledgers, open the possibility of a currency that is as transparent and resistant to manipulation as it is independent of the political policies of any one government.  If blockchain technology and the enormous networked computational power that supports it had existed in the 1940’s, Bretton Woods may have reached a very different conclusion.  While the technology did not exist at that time, eventually someone is likely to find (or stumble upon) the perfect mix of technologies and policies for creating a unit of exchange and reserve medium that is not just a mode of Ponzi-scheme style speculation or a tool for money laundering.  Once that happens, those who now dismiss cryptocurrencies as a ridiculous passing fad will look just as foolish at the vast majority of 18th century economists and bankers who dismissed fiat currencies as ‘the promises of fairies.’