Author: Scott Buchanan

Controversial Study Finds Lockdowns Don’t Reduce COVID Mortality; Some Less Controversial Takeaways

Scott Buchanan2 Comments

A recent working paper, A LITERATURE REVIEW AND META-ANALYSIS OF THE EFFECTS OF LOCKDOWNS ON COVID-19 MORTALITY,  released by Steve Hanke (professor of Applied Economics at Johns Hopkins) and other applied economists (Jonas Herby of Denmark and Lars Jonung of Sweden) has been understandably controversial. I will survey some of its methods and conclusions, and (very briefly) some of the reactions to it.

I will not take a position on how valid its conclusions are, for the simple reason that I am totally unqualified to make such a judgement. What I would like to contribute are a couple of takeaways that are worth considering for the next pandemic or even the remainder of this one.

Methodology of the Paper

Where and how you start largely determines where you will end up. The authors included studies which were (as much as possible) straight apples-to-apples ex post empirical observations (e.g., between otherwise similar countries or U.S. states, at similar times), while avoiding ex ante studies which relied primarily on models of what-would-have-happened-without-lockdowns:

They write (I omit some details, marked with ellipses):

We distinguish between two methods used to establish a relationship (or lack thereof) between mortality rates and lockdown policies. The first uses registered cross-sectional mortality data. These are ex post studies. The second method uses simulated data on mortality and infection rates. These are ex ante studies.

We include all studies using a counterfactual difference-in-difference approach from the former group but disregard all ex ante studies, as the results from these studies are determined by model assumptions and calibrations.

Our limitation to studies using a “counterfactual difference-in-difference approach” means that we exclude all studies where the counterfactual is based on forecasting (such as a SIR-model) rather than derived from a difference-in-difference approach. This excludes studies like…We also exclude all studies based on interrupted time series designs that simply compare the situation before and after lockdown, as the effect of lockdowns in these studies might contain time-dependent shifts, such as seasonality. This excludes studies like….

The authors in particular address a study by Seth Flaxman, which had claimed great effectiveness for lockdowns. They note Flaxman’s modeling approach likely overstated the effects of lockdowns, as noted by other critics of Flaxman:

Given our criteria, we exclude the much-cited paper by Flaxman et al. (2020), which claimed that lockdowns saved three million lives in Europe. Flaxman et al. assume that the pandemic would follow an epidemiological curve unless countries locked down. However, this assumption means that the only interpretation possible for the empirical results is that lockdowns are the only thing that matters, even if other factors like season, behavior etc. caused the observed change in the reproduction rate, Rt. Flaxman et al. are aware of this and state that “our parametric form of Rt assumes that changes in Rt are an immediate response to interventions rather than gradual changes in behavior.” Flaxman et al. illustrate how problematic it is to force data to fit a certain model if you want to infer the effect of lockdowns on COVID-19 mortality.

Conclusions and Controversy

In the interests of time/space, I will give just a few snapshots here. A key conclusion is:

Overall, our meta-analysis fails to confirm that lockdowns have had a large, significant effect on mortality rates. Studies examining the relationship between lockdown strictness (based on the OxCGRT stringency index) find that the average lockdown in Europe and the United States only reduced COVID-19 mortality by 0.2% compared to a COVID-19 policy based solely on recommendations. Shelter-in-place orders (SIPOs) were also ineffective. They only reduced COVID-19 mortality by 2.9%.

The authors are well aware that this is highly controversial, so they cite other studies that have reached similar conclusions. They offer further defenses against a number of other objections, which again I will not elucidate here.

As might be expected, U.S. mainstream media outlets (which have long accused red-state governors of reckless endangerment for not locking down as hard as blue states) have either ignored this paper, or tried to discredit it. An article in the Sacramento Bee, for instance, devoted nearly a whole paragraph to statements by Seth Flaxman (yes, that Seth Flaxman, see above) attacking the paper, while not reaching out to the paper’s authors for a response. And as might be expected, right-leaning media outlets are citing the study as vindicating the freedom-loving red states’ policies over against the heavy-handed Establishment.

Some Maybe Useful Takeaways

Pushing past this predictable partisan unpleasantness, I’ll share a couple of items from the paper that seem worth pondering. One was a strong statement of the harms done by lockdowns, with a plea for considering these in future policy-making. This sort of balancing of wide-ranging consequences is normally considered enlightened economics; in general, we as a society do not say, “The only thing that matters is saving/prolonging every life, no matter the other costs” :

The use of lockdowns is a unique feature of the COVID-19 pandemic. Lockdowns have not been used to such a large extent during any of the pandemics of the past century. However, lockdowns during the initial phase of the COVID-19 pandemic have had devastating effects. They have contributed to reducing economic activity, raising unemployment, reducing schooling, causing political unrest, contributing to domestic violence, and undermining liberal democracy. These costs to society must be compared to the benefits of lockdowns.

The other general issue that was touched on at several points in the paper was the importance of voluntary (as opposed to mandated) social distancing. Nothing in this paper disputed that social distancing, especially in pandemic peak periods, will slow the spread of a disease. The issue here is the effectiveness of state-imposed measures versus voluntary actions. These voluntary actions could be (on the positive side) conscious adoption of distancing and masking with or without legal requirement, or (on the other side) flouting of the laws or careless interpersonal contacts which were unsafe even if they were not illegal. These more risky actions may simply reflect local cultural attitudes (which are hard to change), or they may reflect less urgent government messaging (which is something that can be addressed by policy). A couple of relevant paragraphs are:

What explains the differences between countries, if not differences in lockdown policies? Differences in population age and health, quality of the health sector, and the like are obvious factors. But several studies point at less obvious factors, such as culture, communication, and coincidences. For example, Frey et al. (2020) show that for the same policy stringency, countries with more obedient and collectivist cultural traits experienced larger declines in geographic mobility relative to their more individualistic counterpart. Data from Germany Laliotis and Minos (2020) shows that the spread of COVID-19 and the resulting deaths in predominantly Catholic regions with stronger social and family ties were much higher compared to nonCatholic ones…

Government communication may also have played a large role. Compared to its Scandinavian neighbors, the communication from Swedish health authorities was far more subdued and embraced the idea of public health vs. economic trade-offs. This may explain why Helsingen etal. (2020), found, based on questionnaire data collected from mid-March to mid-April, 2020, that even though the daily COVID-19 mortality rate was more than four times higher in Sweden than in Norway, Swedes were less likely than Norwegians to not meet with friends (55% vs. 87%), avoid public transportation (72% vs. 82%), and stay home during spare time (71% vs. 87%). That is, despite a more severe pandemic, Swedes were less affected in their daily activities (legal in both countries) than Norwegians.

And:

We believe that Allen (2021) is right, when he concludes, “The ineffectiveness [of lockdowns] stemmed from individual changes in behavior: either non-compliance or behavior that mimicked lockdowns.” In economic terms, you can say that the demand for costly disease prevention efforts like social distancing and increased focus on hygiene is high when infection rates are high. Contrary, when infection rates are low, the demand is low and it may even be morally and economically rational not to comply with mandates like SIPOs, which are difficult to enforce. Herby (2021) reviews studies which distinguish between mandatory and voluntary behavioral changes. He finds that – on average – voluntary behavioral changes are 10 times as important as mandatory behavioral changes in combating COVID-19. If people voluntarily adjust their behavior to the risk of the pandemic, closing down non-essential businesses may simply reallocate consumer visits away from “nonessential” to “essential” businesses, as shown by Goolsbee and Syverson (2021), with limited impact on the total number of contacts.

Looking at the vastly different death tolls per capita between, say, Australia (with a more rigorous lockdown and quarantining policy) and the U.S. or U.K, I find it difficult to believe that policy mandates have as little effect as found in this study. That point aside, I think the study is helpful in reminding us that it is what people actually do that matters. Foot-dragging compliance with imposed regulations is a different thing than fully-bought-in compliance, which speaks to motivation and values.

Regarding messaging by governments and other organizations, I suspect that there is not a one-size-fits-all motivational message here. It could be worth reflecting on what sort of message would resonate with a particular population subgroup. (This is just basic Marketing 101: Identify your various segments and tailor the messages to them). Berating some subgroup for their poor choices to date may make the berators feel warmly superior, but that does not move things forward.

I’ll close with some anecdotal observations regarding behaviors, independent of mandates. I have personally continued to generally avoid gatherings where large numbers of people are talking or singing, and wear an effective mask*  when in such a meeting, regardless of what the current rules are.

Also, I have shuttled back and forth between northern Virginia (very blue) and Alabama (very red) in the past two years. Whether or not formal lockdowns or mask mandates were in force, I saw much more mask-wearing in northern Virginia, compared to Alabama. I suspect this reflected overall attitudes and behaviors regarding social distancing. Not saying one is right and one is wrong, but the total COVID deaths per 100,000 in Virginia (196) to date are roughly half of deaths in Alabama (356).

*See Suggestions for Comfortable and Effective Face Masks, e.g., Korean KF94’s on effective, comfortable face masks

“Pfumvudza” Planting Technique Revolutionizes Crop Yields in Zimbabwe

Scott Buchanan2 Comments

Birth of a New Farming Method

Brian Oldreive is a Zimbabwean, born there in 1943. A star cricket player as a young man, he moved on to become a successful tobacco farmer. In 1978, he became convinced (given the harm that tobacco causes) that he should no longer grow tobacco. When he tried to switch to food crops like corn (called maize in Africa), using standard agricultural practices, he could not make a go of it. He ended up losing his farm and his livelihood due to his moral stand against growing tobacco. He went to work for another large farm, but even there it was a struggle to grow food at a profit. Soil was eroding and crop yields were falling.

He began to think that maybe there was a better way to farm than the usual Western model. One day in 1984 when he was walking in the forest, he noticed that the trees and bushes there grew just fine, with no help from humans, no plowing or irrigation. How was that possible? He observed two things. First, the ground was covered with a thick layer of leaves and other debris, which formed a natural mulch. Beneath this mulch layer (“God’s blanket”), the soil was moist. This was while the region was experiencing drought, and regular farmers’ fields were parched. Secondly, the undisturbed mulch layer naturally decayed to return nutrients to the soil.

Oldreive parlayed those observations into a system of no-till agriculture which mimics the created order. He called this “Farming God’s Way”. The emphasis is on high productivity from a small plot. This involves precision planting at the proper time, crop rotation (corn/beans), and deep mulching to retain moisture and keep weeds down. Nutrients are supplied by both compost and chemical fertilizers.

This method can be practiced by farmers owning no tool other than a hoe. This breaks the cycle of farmers or nations going into debt to purchase expensive Western agricultural machinery, which then may become useless due to inadequate maintenance out in the bush.    

This approach contrasts with conventional farming practice which plows up the soil, leaving it to erode away when it rains and to dry out when it doesn’t rain. Plowing also disturbs the natural ordering of the microbial communities within the upper and lower soil layers. (There is aerobic metabolism near the surface, and a whole different anaerobic community in the soil lower down).

Oldreive started by planting one small plot using this approach in the estate he was then managing:

I decided to copy what God does in natural creation and I observed that the leaves fall down on the ground and the grass dies down and there is a protective blanket over the earth, and that is how God preserves soil to infiltrate the water that we receive…

Many people did not believe me and said I was wasting time. But I was not deterred because I was convinced that this method would work. I decided to put the model into practice by starting with just two hectares. I prayed for wisdom and God showed me how to plant maize into wheat straw residue. This is just the same as what God does in nature.

That two-hectare (about 5 acre) plot confounded the skeptics, yielding about ten times more corn per hectare than the local average yields. He then planted more acreage using this approach. Over the next few years, while a number of conventionally-run farms around him went broke, he kept expanding and growing more food with his system.

Oldreive believed these insights were gifts from God which were meant to be shared with others. Therefore, he shifted his effort towards teaching other Africans how to farm with this method.

Things Fall Apart in Zimbabwe

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European Energy Crisis, Updated: Germans Shut Down Perfectly Good Nuclear Plants, Utilities Send Socks to Shivering Customers and Advise Eating Porridge

Scott Buchanan3 Comments

As we noted in September, natural gas prices are sky-high in Europe. Coal-burning power plants have been shut down and the windmills have not spun as fast as expected, which led to a drawdown of European natural gas stocks for electric power generation. The Russians are not sending as much gas as hoped through their pipelines, so Europe is scratching around for (very, very expensive) liquified natural gas to be shipped by ship from the U.S. and the Middle East.

As noted, this hurts European economies in various ways. Fertilizer plants and aluminum smelters have shut down because of too-costly natural gas feedstock, consumers are paying much more in utility bills, and some governments are going deeper into deficit by paying subsidies to partially cushion consumers. This energy shortage also makes Europe very vulnerable to Russia, at a time when Putin is menacing Ukraine with invasion.

France derives about 70% of its electricity from nuclear energy. Due to its low cost of generation, France is the world’s largest net exporter of electricity, earning over €3 billion per year from this. China and other countries are ramping up nuclear. (The U.S. is sadly dysfunctional when it comes to building nukes; we can’t seem to do anything without years of delay and billions in cost overruns).

Like nearly everything in Germany, the German nuclear power plants are well-run. They have never had a serious incident. Nuclear power plants pump out gobs of electric power with essentially no CO2 emission.  If you think that green advocates in Germany would therefore desire to keep these plants running, you would think wrong. Such is the loathing for nuclear power that Germany is shutting them down. Every single one. Katja Hoyer writes:

Just before midnight on Dec. 31, Germany switched off three more of its nuclear power plants [including one in Grohnde]. Once it had 17; now only three are left, and they too will be shut down at the end of the year. Soon Germany will produce no nuclear energy at all. But the activists were wrong to celebrate. Germany’s hasty nuclear retreat is neither safe nor green. It’s a disastrous mistake that will have ramifications well beyond the country’s own borders.

The Grohnde plant is a perfect example of what Germany is giving up. It was one of the most productive nuclear power plants in the world. It provided enough electricity to cover 15 percent of Lower Saxony’s annual energy needs single-handedly, saving 10 million tons of carbon dioxide emissions a year in the process. The site even made headlines in February 2021 for producing more electricity than any other nuclear power plant in the world. Now it will have to be dismantled at a cost of around 1 billion euros.

The loss of these nukes puts further strain on the European-wide grid. The irony of shutting these plants down and therefore buying more power from other countries generated by nuclear power and by burning more gas and coal seems to be lost on the Germans. Their plan to mitigate the effects of calm winds is to build even more windmills, even if that requires deforesting vast tracts of woodland.

Let Them Eat Porridge

The U.K. utility Ovo, which prides itself on providing all-renewable power, sent customers a link with advice for keeping warm whilst turning down their thermostats this winter. These suggestions included cuddling your pets, eating hot porridge, cleaning the house, having a hula hoop contest, doing star jumps (jumping jacks), and leaving the oven open after you are done baking. I leave to your imagination how this advice was received by the British public. In lieu of affordable electricity, the utility company E.ON which shut down one those German nuclear power plants sent out 30,000 pairs of socks to encourage people to get by with less power and heat.

You couldn’t make this stuff up.

Ongoing Drama with Turkey’s Currency: Heterodoxy or Lunacy?

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Economics involves human beings making decisions. Where there are humans, drama is never absent. Hence, somewhere in the broader financial sphere, there is always some drama. The chart below displays gyrations in the exchange rate of the Turkish lira which may be fairly characterized as “dramatic”. This chart shows the lira-per-dollar exchange rate over the past six months; a higher number here means lower lira valuation.

Foreign Exchange Market Prices, Turkish Lira per Dollar.         Source: TradingView.com

What is going on here? Why the spike up in November/December, followed by an even more sudden drop?

As usual, loss of value in foreign exchange goes hand in hand with domestic inflation. Inflation within Turkey for the month of December was reported to 36% on an annualized basis. Now, an orthodox economic response to runaway inflation includes raising interest rates. Higher interest rates tend to make a currency more valuable. Higher interest rates encourage people to hold onto their currency, since they are rewarded by interest on their savings. Conversely, low interest rates, especially when coupled with inflation, motivates people to spend down their money before it loses more value. In the case of emerging market countries like Turkey,  high inflation/low interest drives people to exchange their local currency for more stable foreign currencies, like dollars or euros (or crypto stablecoins like Tether).

But Turkey is Turkey, and Turkey is run by the authoritarian President Erdogan. He has economic views which might most charitably characterized as “heterodox”. Erdogan claims that high interest rates actually cause inflation. His views may be influenced by the prohibition on charging interest in classic Islamic practice. The Turkish president has stated, “My belief is that interest rates are the mother of all evils. Interest rates are the cause of inflation. Inflation is a result, not a cause. We need to push down interest rates.”  President Erdogan has sacked numerous treasury officials who disagreed with him, and pressured the central bank to implement four interest rates cuts in the last four months of 2021.  

It seems he hopes to stimulate enough internal growth to paper over any other problems. I think there could be some merit to that notion, but the current inflation level is toxically high. Lower- and middle-class Turks find it hard to purchase necessities.

 Lowering the value of your currency to make your exports more attractive has been practiced successfully by various Asian nations, but Turkey is too exposed to foreign exchange to weather such a huge drop in the value of the lira. A large part of Turkey’s recent economic growth has been funded by foreign investors, and that may dry up because of the currency instability. Turkey is dependent on imports for many essentials, including all of its energy needs, so imports have become much more expensive for Turks as their currency depreciates. Furthermore, because of the fluctuating value of the local currency, many loans are denominated in dollars or euros. This makes it burdensome for borrowers to keep up payments of interest and principal, when these foreign currencies have become more expensive.

Modern currencies have essentially no intrinsic value. Money is a big confidence game. A shopkeeper will take my dollar bill in exchange for some candy, because he is confident that some other party will in turn accept that dollar bill in exchange for something else of value. If confidence in a currency collapses, so does its exchange value.

Foreign creditors and domestic Turkish consumers were becoming more and more nervous about the prospects for the lira in late 2021, as inflation was fueling further inflationary expectation.  It crashed to a record high exchange rate of 13.44 against the dollar on November 23 after the Turkish leader insisted that rate cuts would continue.

Things really started getting out of control in mid-December. Turks frantically ditched their currency in exchange for euros and dollars, which led to further devaluation of the lira.  On December 21st, however, the Turkish government unleashed an innovative initiative. They offered to backstop the value of the lira deposits of Turkish residents, as long as those deposits were held in lira for a certain period of time. Besides offering interest on the deposits, the offer was to compensate depositors for any loss in value against the dollar. The intent was to motivate residents to keep their lira as lira.  

Turkey’s new Finance Minister Nureddin Nebati has no real finance background; his main qualification for office appears to be a willingness to do what his boss wants. When Nebati was asked to give details of this initiative, he reportedly answered thus: “”I won’t give a number now. Can you look into my eyes? What do you see?… The economy is the sparkle in the eyes.”   Hmm.

President Erdogan has said he is protecting the country’s economy from attacks by “foreign financial tools that can disrupt the financial system.” Western economists are not impressed. Market strategist Timothy Ash commented, “ More complete and utter rubbish from Erdogan…Foreign institutional investors don’t want to invest in Turkey because of the absolutely crazy monetary policy settings imposed by Erdogan.”

At any rate, this unusual measure, combined with old-fashioned central bank intervention (the Turkish central bank is believed to have used some 10 billion dollars’ worth of its foreign reserves to buy lira), seemed to stem the immediate panic. Within a day, the exchange rate thudded down from about 18 to about 13, which is roughly the level today.

It has been pointed out that it simply is not feasible for the government to backstop all relevant bank deposits against a huge currency depreciation;  the Turkish government and central bank would burn through all their foreign reserves, and have to resort to printing ever more worthless lira. However, sometimes the mere promise of such a guarantee (whether or not it is practical) is enough to restore some measure of confidence, which in turn means that the currency will not collapse and  thus the resources of the central bank will not be put to the test.   As we said, confidence is what it is all about. We will see how this plays out.

Primary Driver for This Inflation Is Surging Demand (Fueled by COVID Payments), Not Supply Chain Constraints

Scott Buchanan3 Comments

Inflation is colloquially defined as, “Too much money chasing too few goods (and services)”. Supply chain constraints get talked about, and these are widely blamed for the inflation we are seeing.  Of course, supply limitations play into inflation, but to focus on them is to miss the elephant in room. The primary driver of this inflation is not “too few goods”, but “too much money.”

Such is the thesis of a widely circulated article by Ray Dalio’s investing firm Bridgewater Associates, “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere.” The point is summarized:

While the headlines tend to focus on the micro elements of the supply shock (the LA port, coal in China, natural gas in Europe, semiconductors globally, truckers in the UK, etc.), this perspective largely misses the macro cause that is likely to persist and for which there is no idiosyncratic solution. This is not, by and large, a pandemic-related supply problem: as we’ll show, supply of almost everything is at all-time highs. Rather, this is mostly an MP3-driven upward demand shock. [emphases in the original]

In Bridgewater’s terminology, “MP3” is “Monetary Policy #3”, and refers to massive deficit spending combined with central bank quantitative easing. We saw this implemented in 2020-2021 when the federal government pumped out trillions of dollars of stimulus payments and enhanced unemployment benefits, and the Fed instantly soaked up the bonds that were issued to pay for these trillions. This fed/Fed combo amounts to simply printing money on an enormous scale.

Those trillions of dollars funded a huge surge in durable goods purchases. By late 2021 the supply of these goods was well above 2019 (pre-COVID) levels, and even above normal growth trendlines. However, the supply and transport systems simply could not grow fast enough to accommodate this insatiable demand. Charts below substantiate this. To focus on supply chain bottlenecks of themselves is misleading. The primary driver for this inflation has been the trillions of dollars of federal largesse. The Fed knows all this, obviously, but Jay Powell (the Chief Enabler of this deficit spending) would likely not have been reappointed if he spoke too directly about the cause of this inflation. Hence the endless prattle about supply chains.

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How Many Semiconductor Chips Are There in a Car?

Scott Buchanan7 Comments

I recently read a statement that there is something like 1400 individual semiconductor chips in a typical modern car.  I wondered, “Can that be correct?”   1400 is a lot of anything.  I have torn apart whole PCs and found only a few dozen chips.

Chips in cars have big economic significance. As called out on a post back in March, COVID shutdowns of semiconductor plants and other factors meant a shortage of critical chips for cars. This has led to extensive shutdowns of car and truck assembly lines in 2021, affecting employment and auto maker profits.  It is estimated that the world lost 11.3 million units of production in 2021 due to the chip shortage, and may lose another 7 million units in 2022.

But back to 1400  chips…I did not find the One True Pronouncement of chips in cars (a promising N Y Times article lay tantalizingly behind a paywall). But I found a number of statements that corroborated that order of magnitude, and also fleshed out the many uses for such chips.

This picture is worth maybe 1400 words:

Source

Here is an even more detailed diagram (sorry, hard to read):

Source

Cars and trucks have something like 100 distinct electronics modules, and each module has multiple chips. Wiring in cars is expensive and vulnerable, so it is better to distribute the information processing rather than run a bunch of wires back to one central processor.

The chip supply situation should sort itself out by 2024, if all goes well. Meanwhile, electronics has become the tail that wags the automotive dog – – electronics have gone from being just 18% of a car’s cost in 2000, to being 40% of its cost in 2020 , and projected to be 45% by 2030:

Mouse Wars: Amazon Mousetrap Reviews as Literature

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I have looked at various mouse traps on Amazon. The reviews there are a tremendous source of information. Folks get passionate about their battles with the little rodents who invade and foul their homes. Some reviews soar to literary heights. Here is a user who pours out his despair over being bested by a mouse:

Earthlings Beware!!!! The Toughest Mouse in the World Still Lives: You Could Be NEXT!!!!!!!

Reviewed in the United States on June 30, 2020

These traps were incredibly easy to used and bait. However, I bought these traps To prevent my pets or children from getting injured and to spare my wife from picking up the dead mouse if I wasn’t home. In theory it was the perfect conceptualized mouse trap for a busy house. When this trap arrived I was ready to declare war on the invaders. I put on my camo gear, covered my face with camo paint took some peanut butter out of the cabinet and baited this rodent killing machine. I turned the switch to “set” and tucked it in a spot where I saw mouse droppings. Then I shut off all the lights, Turned on my night vision goggles and waited. Nothing happened, that fury bastard beat me, but I was determined to win the war. I repeated the process the second night only this time I used popcorn to make a trail to the plastic rodent guillotine. I set the trap and went to bed. By dawn I woke up like a child on Christmas, went running down the stairs and to the trap. Boom! The indicator on the side said mouse caught! The pride of winning this battle washed over me. I had defended my castle against an fierce enemy . But wait, why is the trap so light? Surely if a dead mouse was in here I would have been able to feel the weight difference of such a light and sleekly designed trap. I rotated the device in my hand to peer inside of the killing machine. There I stood, with all the pride draining from my short lived victory. The mouse had indeed been attracted to the trap, it followed the popcorn trail of happiness right inside of the devil’s mouth to feast on the peanut butter buffet set up inside. Once inside it tripped the killing mechanism as designed. But this mouse in my house was no ordinary mouse. He must have been a ninja mouse because he dodged the killing instrument likely with a three quarter lateral spin and landed on one hand. He proceeded to eat the peanut butter, then chew his way out of the trap to warn the other ninja mice. I was beaten, defeated by a mouse. I packed up my family and our belongings and moved to new house leaving our old house to the victor. At my new house though, we adopted 70 cats, and although we smell like a mixture of broken dreams and cat urine we never heard from the ninja warrior mouse or his friends again.

 Tomcat Kill & Contain Mouse Trap, 2 Traps  , review by “Brain“

Here is gangsta-style epic, ending in a bitter-sweet victory:

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How Can Cryptocurrency Accounts Pay Such High Interest?

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As noted last week, I am happily receiving 9% interest in my new crypto account at BlockFi. How can they do that? The short answer is that BlockFi lends out my holdings to other parties, who pay somewhat more than 9% interest to BlockFi. This model is common to essentially all of the crypto brokers who pay out interest, but I will focus on BlockFi because (a) I have skin in the game there, and (b) they have been fairly transparent about their operations.

On the simplest level, this operates like a plain bank savings account does. A bank takes in funds from depositors, and (to oversimplify) lends those funds out to borrowers. The bank then pays to its depositors a portion of the interest it receives from its borrowers. Up until the last few years, this bank savings account model worked pretty well;  a depositor might receive something like 2-3% interest on a savings account or certificate of deposit. More recently, short term rates have been near zero, so depositors get almost nothing in a bank savings account.

As noted earlier, BlockFi pays up to 4.5% interest on Bitcoin and 5% on Ethereum. These are leading, high volume coins that are widely used in decentralized finance (defi). Here is how BlockFi describes the parties to which it lends (mainly) Bitcoin:

Who Borrows Crypto?

BlockFi works with institutional counterparties for trading and lending cryptocurrency. These counterparties look to us to help them provide liquidity for their businesses. But who are some of these borrowers?

( 1 ) Traders and investment funds who see a fragmented marketplace and discover arbitrage trading opportunities. Arbitrageurs need to borrow crypto in order to close mispricing between exchanges or dispersed markets. Similarly, margin traders need to borrow in order to execute their trading strategies. This is a simple example, but it demonstrates how arbitrage and margin trading activities facilitate price discovery, which is an essential component of developed markets.

( 2 ) Over the counter (OTC) market makers make money by connecting buyers and sellers who do not want to transact over public exchanges. OTC desks need to keep inventory on-hand to meet their client demand. Owning crypto outright is capital intensive and comes with the attendant risks of price fluctuations. Instead, they may prefer to borrow inventory in order to facilitate transactions. Liquidity is another essential component to healthy markets.

( 3 ) Businesses that require an inventory of crypto to provide liquidity to clients. This bucket includes companies like crypto ATMs. These businesses also need to be able to support withdrawals while keeping the vast majority of their crypto assets in cold storage. The liquidity we provide them helps with these basic and important functions.

A key piece of this lending is to require that the counterparty post adequate collateral for the loans. This is somewhat similar to a bank lending you money to buy a house, with the house as collateral for your loan. If you lose your job and cannot pay back the loan, the bank has the right to sell your house to recovery its money. Similarly, BlockFi wants to ensure that if something goes sour with their loan of your Bitcoin, they can get their funds back and make your account whole. Obviously, BlockFi customers like me are relying on BlockFi to manage this properly and to minimize lending losses. BlockFi goes on to reassure us:

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Earning Steady 9% Interest in My New Crypto Account

Scott Buchanan4 Comments

One reason for opening an account where you can purchase cryptocurrencies is to speculate on their price movements. There have been many cases where some coin has quadrupled in a few weeks, or gone up ten-fold in a few months, or even a hundred-fold within a year.

Another facet of crypto accounts is that in some cases you are paid interest on the coin you have purchased and hold in your account. That was the main draw for me. I already have a little Bitcoin and Ethereum exposure in my brokerage account through the funds GBTC and ETHE, enough to feel the thrill of victory and the agony of defeat when they go up, up, up and down, down, down, but I am not a big speculator at heart. So, I am drawn to the so-called “stablecoins”, whose value is tied to some major regular currency such as the U.S. dollar. It turns out that you can get high, steady interest payments on those stablecoins.

There are several crypto brokers which pay interest on coins. Some names include BlockFi, Celsius, Nexo, and Voyager Digital. Several such firms are reviewed here.  Initially I leaned towards Voyager, since it gives access to lots of the new, little alt-coins where you can 10X your money if you pick the right ones and jump in early. However, I still do my own taxes, and the tax reporting from Voyager looked daunting. Last I looked, they just provide a dump of all your transactions in a giant table, and it’s up to you to figure out capital gains/losses. The word on the street is that this is not as straightforward as it seems. Also, Voyager offered only mobile apps, not a desktop interface. All in all, Voyager seems more geared towards intense younger Robin Hood/Reddit crowd, punching daring trades into their phones at all hours.

BlockFi is quite staid by comparison. It only offers a few, mainstream coins. However, it is one of the best-established firms, and it provides a nice clear 1099 tax reporting form at the end of the year. BlockFi is backed by major institutional partners, and manages over $9 billion in assets.

Unlike some of its competitors, it is U.S.-based, and as such it is structured to function well in this jurisdiction. Also, its interest payouts are straightforward. In contrast, many of its competitors incentivize  you to receive your interest in special tokens issued by those companies, which adds another element of risk. Finally, BlockFi allows you to immediately transfer money in and out of your account by using a bank ACH link. I wanted that flexibility since I plan to keep a portion of my cash holdings in BlockFi instead of in the bank, but I want to be able to access those cash holdings on short notice and without penalty. (Last week I described some of my struggles over using the Plaid financial app which manages the bank-BlockFi interface, but I was able to get past that).

All in all, BlockFi is boring in a good way. All I want to do is make steady money, with minimal distraction. Here is a listing of the interest rates paid for holdings of Bitcoin and Ethereum:

BlockFi only pays significant interest for smaller holdings of these coins. (We will discuss the reason for this seemingly odd policy in a future blog post; it is basically an outcome of BlockFi’s conservative financial practices).

For Bitcoin, the interest rate is 4.5% for up to 0.10 BTC, which at today’s prices is about $4,700. After that, the interest plummets to 1%, and to a mere 0.10% for more than 0.35 BTC (about $16,000). There is a similar pattern for Ethereum. If your goal is to hold large amounts of these coins and earn substantial interest on them, there are probably better platforms than BlockFi.

However, the interest picture is brighter for the stablecoins. The biggest U.S.-based stablecoin is USD Coin (USDC), which is backed by significant institutions. Gemini Dollar (GUSD) is smaller, but also takes great pains to garner trust. Its issuer, Gemini, operates under the regulatory oversight of the New York State Department of Financial Services (NYDFS). It boasts, “The Gemini Dollar is fully backed at a one-to-one ratio with the U.S. dollar. The number of Gemini dollar tokens in circulation is equal to the number of U.S. dollars held at a bank in the United States, and the system is insured with pass-through FDIC deposit insurance as a preventative measure against money laundering, theft, and other illicit activities.” GUSD is the “native” currency within BlockFi, though users can easily exchange it for other coins. At this point I am holding just GUSD, though if I put in more funds, I would plan to partially diversify into USDC. Besides being much bigger, USDC now runs on multiple platforms, whereas GUSD is limited to Ethereum; if Ethereum finally does switch from proof-of-work to proof-of-stake, it may be more subject to outages or hacking, so it would be nice to not be totally dependent on Ethereum.

For these two stablecoins, BlockFi currently pays 9% interest on holdings up to $40,000, and a respectable 8% on larger holdings:

A complete list of BlockFi interest rates (which change from time to time) is here.

The alert reader may at this point object, “Hey, you are losing most of the purported benefits of blockchain cryptocurrencies – – without holding the coins in your own wallet, you don’t actually own them, so you are back dependent on The System. Moreover, those stablecoins are centrally managed, not deliberately decentralized like Bitcoin and Ethereum. You are treating this like a plain bank account!”

My reply is, “Yes, I am treating it like a plain bank account – – but an account that pays me 9% interest, with no drama.” That is exactly what I wanted.

UPDATE MARCH 2022 – – BLOCKFI INTEREST ACCOUNT NO LONGER AVAILABLE. For some time now, state and federal government authorities have been hassling crypto exchanges that offer interest on crypto holdings. In February, the SEC fined BlockFi $100 million for allegedly violating securities laws, and shut them down from taking in any new funds for interest-bearing accounts. BlockFi hopes someday to provide a regulation-compliant interest product, but don’t hold your breath.

Zealous state and federal regulators have been attacking other crypto firms offering interest, such as Celsius and Voyager. The main player still standing that I am aware of is Gemini. Gemini is very conscientious about audits and has always tried to work closely with regulators. It is offering about 6.5% interest on stablecoins (which is still way better than money markets or CDs), and a measly 1-1.25% on Bitcoin and Ethereum.

Opening My New Crypto Account: Plaid App Wants My Full Bank Login Information

Scott Buchanan4 Comments

I finally got around to opening an account at BlockFi where I can buy cryptocurrencies directly. Later I will discuss why I chose BlockFi and what I plan to do there. For now I’d like to mention one roadblock I hit in starting it up.

Signing up for the BlockFi account itself was pretty straightforward. But when it came to actually funding it, I was required to use Plaid to handle transfers of funds to and from my bank accounts – – and Plaid wanted me to tell them my full username and password that I use to log into my bank account. “No,” I said to myself, “they can’t really mean that.” But yes, they do mean that.

Armed with these credentials Plaid is able to not only pull money out of my account (like, for instance, PayPal does), but they can also login as me and have access to every financial transaction I have ever done, every check I have ever written. It’s not that I have anything interesting to hide, but this level of privacy invasion creeps me out. Also, the sad truth is that any company, including Plaid and its partners, are vulnerable to hacking, so I am not thrilled at having my bank login information floating out there in cyberspace.

On their website, Plaid is nice enough to disclose the scope of its snooping:

We collect the following types of identifiers, commercial information, and other personal information from your financial product and service providers:

  • Account information, including financial institution name, account name, account type, account ownership, branch number, IBAN, BIC, account number, routing number, and sort code;
  • Information about an account balance, including current and available balance;
  • Information about credit accounts, including due dates, balances owed, payment amounts and dates, transaction history, credit limit, repayment status, and interest rate;
  • Information about loan accounts, including due dates, repayment status, balances, payment amounts and dates, interest rate, guarantor, loan type, payment plan, and terms;
  • Information about investment accounts, including transaction information, type of asset, identifying details about the asset, quantity, price, fees, and cost basis;
  • Identifiers and information about the account owner(s), including name, email address, phone number, date of birth, and address information;
  • Information about account transactions, including amount, date, payee, type, quantity, price, location, involved securities, and a description of the transaction; and
  • Professional information, including information about your employer, in limited cases where you’ve connected your payroll accounts or provided us with your pay stub information.

The data collected from your financial accounts includes information from all accounts (e.g., checking, savings, and credit card) accessible through a single set of account credentials.

Plaid promises not to sell or rent this personal data. Fine. But even if they don’t formally sell it, they may simply give it away widely. In their words:

We share your End User Information for a number of business purposes:

  • With the developer of the application you are using and as directed by that developer (such as with another third party if directed by you);
  • To enforce any contract with you;
  • With our data processors and other service providers, partners, or contractors in connection with the services they perform for us or developers;
  • With your connected financial institution(s) to help establish or maintain a connection you’ve chosen to make;
  • If we believe in good faith that disclosure is appropriate to comply with applicable law, regulation, or legal process (such as a court order or subpoena);
  • In connection with a change in ownership or control of all or a part of our business (such as a merger, acquisition, reorganization, or bankruptcy);
  • Between and among Plaid and our current and future parents, affiliates, subsidiaries and other companies under common control or ownership;
  • [etc., etc.]

Yeesh.

I’m sure Plaid means well, but I just didn’t like the sound of all that. So, I came up with a plan: I would start up a second account at my bank, with a slightly different name and a different account number, and just give Plaid access to that one account. The only thing I would do with that account is to fund my BlockFi account, so it would not have years and years of my other financial transactions embedded in it.

In the end, that worked, but it took a more time and phone calls than I expected. Opening the new account was a surprising pain, for reasons I won’t go into here. Then, it turns out that the bank doesn’t have a category for one person having two accounts with two different logins. There was nothing I could do about it online, so I had to talk to someone at the bank who had the power to limit my login authority to my new account. This meant that I now have to use my wife’s login to access my/our old account, which is OK. But it probably would have been cleaner simply to start my new account at some different (online) bank.

Anyway, just in time for the current crypto meltdown (Bitcoin is down more than 20% from its high a month ago), my account is active and funded. More on that in future installments.