## 30 August 2005

### A prize is awarded

Ichabod's has a trivia question every day. The first three people to answer it get free coffee. Yesterday, the question was: What does the term zugzwang describe in the game of chess?

Zugzwang is one of my favorite words. The coffee was only so-so.

## 29 August 2005

### How to win in Iraq

How to win in Iraq. This article is amazingly good. If all it did was explain what the hell is going on over there, it'd be worth reading. But that's just page 2 of 7.

Cliffs-notes version. Don't let the New York Times masthead fool you; David Brooks is a senior editor at the staunchly conservative Weekly Standard.

## 26 August 2005

### Exchange rates

Can someone explain to me how governments can “pin” currency exchange rates?

China's currency, the yuan, apparently remained pegged to the U.S. dollar for years. How did they manage this? It seems like it would be easy for a third party to arbitrage this arrangement to smithereens. Here's how.

Let's assume for the sake of argument that the "correct" exchange rate is 5 yuan = 1 usd (U.S. dollar). That is, on average, a nonperishable good that goes for 1 usd in America can be had for 5 yuan in China. Now let's say the Chinese government has, by government fiat, set 10 yuan = 1 usd. Here's my brilliant plan:

1. Buy 500 yuan worth of stuff in China.
2. Sell it for 100 usd in America.
3. Pocket 50 usd.
4. Take the other 50 usd and buy 500 yuan. You can do this at any bank that accepts the mandated exchange rate.
5. Repeat until there's no more stuff left in China, or no more consumer demand in America, or no more room for dollars in your pockets, or (as seems most likely) the banks wise up and stop giving away yuan.

Net result, you get infinite dollars. Who loses? The manufacturer in China got a fair price, as did the consumer in America. Only the bank got ripped off. So why do banks go along with exchange rate controls?

There are only a few explanations I can see. First, this brilliant plan might be impossible because the friction is simply too much. That is, the bank charges a fee for changing your money; and it costs something to ship the stuff from China to America; and there are taxes and tariffs to be paid; and occasionally you'll buy something that you can't sell for whatever reason; and you have to employ people to do the work. Maybe it's just too expensive. But I don't believe it. If this were the case, there would be no international trade.

Second, maybe the Chinese government steps in to prevent people from running this scam. They could detect that you're spending too many yuan and revoke your business permits and such. I hear the rules involving bringing currency into China are incredibly involved, so maybe this is the case.

Third, the scam is self-limiting. The more it runs, the more it drives down U.S. prices. The lower U.S. prices get, the less attractive the scam is. Likewise, the scam drives prices up in China. That TV you're buying for 500 yuan and selling for 100 usd might cost 600 yuan next month (due to greater demand) and might only bring 75 usd in America (due to greater supply). These prices are much closer to the 10-to-1 exchange rate the Chinese government desired, and they make the scam much less profitable. But even with this explanation, the scam will still run; it just doesn't "go infinite". Undervalued yuan are still being pumped out of banks in exchange for dollars worth half as much.

Fourth, maybe supporting the mandated exchange rate is just a cost of doing business for banks in China. The government requires the banks to do it, at their own expense. In exchange, they're allowed do business in China. I don't see how this would be possible. The price tag is just ridiculous.

Fifth, maybe the Chinese government somehow taps into this cycle so that every time the scam runs, the government ends up with enough in its coffers to pay for all the money it's throwing away. In that case, the higher your tax rates, the more power you have to control exchange rates.

Sixth.... maybe this is what's actually happening. It would explain the ridiculous trade deficit between China and the U.S. But if so, the Chinese central bank is paying for it—right? So in that case, how is the trade deficit a bad thing for the U.S.? Sure, it hurts domestic manufacturing, but it's not like unemployment is out of control over here. And aren't we getting cheap stuff at China's expense?

## 25 August 2005

### Sawzall

Seen on Lambda the Ultimate: Parallel Analysis with Sawzall. Sawzall is a highly parallelizable query language invented at Google. The paper gives several examples of ad hoc queries Google might run internally.

### The foolishness of The Wisdom of Crowds

Two competing memes predict what happens when a choice is made by a group of non-geniuses: “the wisdom of crowds”; “design by committee”. Same scenario; two opposite predictions. What gives?

This book review spills the goods. Only some crowds are wise. The author thinks he knows which ones: they are diverse, their members are independent, control is decentralized, and preferences are properly aggregated.

I have a cynical theory about this book. It takes an idea everyone on the right already believes. It repackages the idea for center-left consumption, scrubs it of all math references, adds lots of stories (for interest) and studies (to pass it off as novel), and phrases the thesis such that you can swallow it and retain every political notion you came in with. That is, the thesis has no real consequences. It's unuseful. I guess the book deserves praise for having a thesis at all; cf. the blob of factoids that is Freakonomics.

A control system is something like a thermostat. There's some variable it's trying to control (the temperature); and to do that it has sensors to measure that variable (thermocouples) and some kind of machinery that can affect it (your air conditioner). One of its important features is that it deals with random external factors that threaten to screw up the system (it was 110° outside today until noon, when it suddenly became rainy and cold).

Another example: in a robot arm, a control system drives the motors to move the arm to the desired location without overshooting it or taking all day to get there. (This is harder to design than you'd think.)

A typical control system can be described by a system of differential equations. The equations describe not only how the control itself works, but also how the world responds to the things the control can do (for example, how fast your house cools when the air conditioner is on). If the control system is good, the equations converge to a desirable state, in the absence of external disturbances. If the control system is bad, the equations result in ringing (unwanted fluctuations) or don't converge at all (your house freezes over). These equations are a precise mathematical model of the system; you can actually solve them to determine the real-world outcome. A qualitative description of the properties of a good control system might appear on page iv of a nine-hundred-page textbook. The equations tell the real story.

Now the private-sector economy could be seen as a huge system of differential equations. In the absence of external disturbances (weather, new technology, natural resources being exhausted, war, Congress, and life generally), how would it behave? Conservatives think it would converge to a balmy 72°F. Liberals think your house would freeze over.

In comes The Wisdom of Crowds with the brilliant resolution to this hairy* math problem: it depends on four unmeasurable variables, and whether they fall above or below certain unspecified thresholds.

Feh.

*To English majors, hard problems are thorny; to geeks, they're hairy.

## 08 August 2005

### The kids get little uncles

I called Dad the day Abby was born to break the news, but he trumped me. He and C. are expecting twins. Two boys, to arrive in November.

They'll be James's half-uncles, but two years younger. He'll have little uncles. They'll have a big nephew and a big niece.

### Fewer people are dying

Prior to 1995, on average, 145 Americans under 50 died every year from chickenpox complications.

In 1995, the chickenpox vaccine was introduced, and now that number has dropped from 145 to 66.

The vaccine probably isn't economically worth it. That is, for the cost, you could probably save a lot more lives doing something else, like overhauling dangerous intersections.

## 06 August 2005

### James thinks it over

Of course, we tried to prepare him.

Months ago, we told James about the baby in Mommy's belly. We told him what the baby would do, where it would stay, and what it would look like. But there's really no way to prepare a first child for the arrival of the second.

When James first saw Abby, it was clear from his expression that he had to reevaluate the whole proposition. He reserved judgment for several days. He became silent and thoughtful when O. or I brought up the subject.

Now he has gotten used to her. Sometimes he's curious. Sometimes he's sweet. He's still generally crankier than usual.

### Abby is born

Olivia woke up at 3:30 last Sunday morning with contractions. At 9:10 AM on 31 July 2005, she gave birth to a perfect baby girl, Abigail Parks Orendorff.

She's sleeping now.