5 min read

The world's amnesia

The world has amnesia about Gorbachev; Ethereum's big merge is coming up; China is getting a bit greener; and the ghost of Arthur Burns haunts Jerome Powell.
Old cartoon showing Gorbachev wheeling away a dead Soviet economy.
Gorbachev presided over the death of the USSR. Source.

1—The world's amnesia

For those out of the loop, Russia's former almost-dictator Mikhail Gorbachev died on Tuesday at the ripe old age of 91. Following an outpouring of generally positive obituaries given he was the leader of the Soviet Union when it collapsed (a net positive for the world), the Washington Post's George Will went down the other road by reminding us that he was actually a pretty bad guy:

"Failing upward into the world's gratitude, Mikhail Gorbachev became a hero by precipitating the liquidation of the political system he had tried to preserve with reforms. He is remembered as a visionary because he was not clear-sighted about socialism's incurable systemic disease: It cannot cope with the complexity of dispersed information in a developed nation. Like Christopher Columbus, who accidentally discovered the New World, Gorbachev stumbled into greatness by misunderstanding where he was going."

Gorbachev didn't want the Soviet Union to collapse. In fact, as Will notes, "The Soviet Union's brittle husk crumbled as Gorbachev struggled to preserve it". Gorbachev's "lasting legacy", argues Will, should instead "be in the lessons that China's durable tyranny has chosen to learn from his and the Soviet Union's downfall":

"Xi says Gorbachev's three ruinous errors were: He relaxed political control of society before reforming the economy, he allowed the Communist Party to become corrupt, and he 'nationalized' the Soviet military by allowing commanders to swear allegiance to the nation rather than to the party and its leader."

You can read Will's full piece here (~4 minute read).

2—"The Merge"

Ethereum – the world's second-largest cryptocurrency – will on 6 September transition from proof-of-work to proof-of-stake, in what is being called "The Merge". Why? To improve efficiency:

"The problem with this [proof-of-work] is that it is incredibly wasteful. Bitcoin has roughly 1 million miners while Ethereum has around 120,000. For every one miner that solves the math equation, tens of thousands more are just wasting electricity. It's one of the reasons why cryptocurrencies use so much electricity to process relatively tiny numbers of transactions compared to a payment company like Visa.
Proof-of-stake is a different method for validating blockchains. Instead of a race, in proof-of-stake systems, 'validators' deposit or 'stake' a number of coins to enter a lottery to be the one to add each block. The coins are held as insurance against bad actors. If a validator misbehaves and approves a fraudulent transaction, for example, their stake can be confiscated. In payment for running the network, validators earn a return on their staked coins from transaction fees."

That's from Harry Guinness, and you can read more here (~3 minute read). But the improvement in efficiency comes at a cost – namely, security. So writes Timothy Lee:

"For example, it's crucial that the algorithm for random committee assignment produce truly unpredictable results. Otherwise, a malicious party might be able to manipulate it to gain a majority control over some committees. The validation algorithm also needs to deal flexibly with the normal turnover of validators without opening the door to either ballot-box-stuffing or denial-of-service attacks.

On top of that, the Ethereum team had to figure out how to make the switch with zero downtime—a feat some commentators have compared to replacing an airplane's engines while it's in the air. Much of the delay over the last two years has been due to evolving plans about how to handle the transition."

There's plenty more in Lee's full article here (~8 minute read).

3—A greener China

Tweet showing China's huge EV takeup.
Right now they're mostly powered by coal, oil and gas.

4—The ghost of Arthur Burns

Will central banks learn from history, or repeat the mistakes of Arthur Burns? Writing in the WSJ, Thomas Sargent and William Silber take us back to 1974:

"The 11% annual inflation of 1974 was the first instalment of double-digit annual price increases of the decade. Some macroeconomists labelled that year's inflation transitory, citing shortages of food and energy as the main offenders. Ignoring those arguments, Burns tightened credit sharply to restrict demand, raising the overnight interest rate to more than 12% by mid-1974. That monetary restraint temporarily cut inflation in half, but subsequent Fed actions allowed it to grow again. The recession that developed in 1974 increased the unemployment rate to about 9% from 5%, and Burns responded by quickly cutting the short-term interest rate in half. But after that he never raised interest rates high enough to curb accelerating prices and regain the upper hand in battling inflation."

Following the recession in 1974 Burns would never again be an inflation hawk, joining those claiming inflation was "transitional" and due to "cost-push inflation", rather than monetary policy.

Sargent and Silber aren't sure if the current Fed chair Jerome Powell has learnt those lessons, noting that the battle against inflation "won't be easy", because:

"Pressure to abandon tight money has already risen in Congress, even though real interest rates are still at historically low levels. And Congress holds the power to change the Fed's mandate. Sen. Elizabeth Warren recently wrote in these pages that 'unfortunately, the Fed has seized on aggressive rate hikes—a big dose of the only medicine at its disposal—even though they are largely ineffective against many of the underlying causes of this inflationary spike.' She asserted that high interest rates won't cure the current inflation, which comes from 'skyrocketing energy prices caused by Vladimir Putin’s war on Ukraine' and 'won’t fix supply chains still reeling from the pandemic.' She neglected to mention that the purpose of the Fed's tight credit is to offset the inflationary effects of the expansionary monetary and fiscal actions of 2020 and 2021, which she and other members of Congress favoured."

In a warning to Powell, they conclude by pointing out that because Burns "failed to do enough, soon enough and for long enough... America suffered a decade of inflation".

You can read Sargent and Silber's full article here (~3 minute read).

5—Further reading...

🤖️‍♀️ "Using an artificial intelligence computer vision system developed by French IT firm Capgemini, the French tax office has identified 20,356 residential swimming pools that had previously gone undeclared... [creating] 10 million euros in additional tax revenue."

⚰️ "In the first two years of the Covid-19 pandemic, the estimated US lifespan has shortened by nearly three years. The last comparable decrease happened in the early 1940s, during the height of the second world war."

🔐 Dynamic zero-COVID in action: "Chinese authorities have locked down Chengdu, a south-western city of 21 million people, following a spike in COVID-19 cases."

🕵️‍♀️ A new UN report found that China's Uyghur detention camps in Xinjiang "may constitute international crimes, in particular crimes against humanity".