WSJ: Cruelty's Currency

Yaroslav Trofimov reports from Honiara, Solomon Islands:

Forget the euro and the yen. In this South Pacific archipelago, people are pouring their savings into another appreciating currency: dolphin teeth.

Islanders demand dolphin teeth for buying brides, a perverse reverse dowry. I wonder if those "weak bidder" bachelorettes fetch a premium in the molars/matrimony market as Mark Gimein might predict. Doubtful.

The "teeth harvesting" process will drop your jaw (no pun intended), so the squeemish are encourged to skip the following block quote:

Organized on particularly calm days several times a year, Malaita dolphin hunts are complicated endeavors, involving dozens of villagers and a flotilla of paddle boats. When a pod of dolphins are spotted frolicking in the ocean, the boats approach them in a semicircle. Then, fishermen start pounding stones and coconut shells under water, producing a rhythm that drives the dolphins into a trancelike state. As the boats close in on the pod, the noise pushes the dolphins toward a particularly swampy stretch of the shore.

"The dolphins see it's dark underneath, think it's deep water, dive and get stuck in the mud," says Mr. Sukufatu. "To subdue them, we cover the breathing hole in their heads with our palms, and push them deeper and deeper into the mud."

Once the dolphins are nearly suffocated, hunters tie strings around their snouts, so as not to damage the teeth in the thrashing, and then hack off their heads with machetes. Then, the teeth are divided among the hunters, while the meat goes to feed the rest of the village, Mr. Sukufatu says.

Isn't it bad enough we catch, kill and can Flipper? Must we also use his cousin's teeth as a medium of exchange and store of value?

Now, don't get me wrong, I value and support the preservation of idigenous traditions just as much as the next Berkeley grad. But we must pause every once in a while and take a fresh look at our vestigial customs and mores through the lens of modernity. (Historical precedent.) Technological advances have empowered modern man to drastically alter his environment -- intentionally or otherwise -- in effect, voiding the check and balance system (arbitrated by Mother Nature) in place during all eras pre-modern. (I recommend the naysayers who claim humans leave no footprint consult the ever-growing list of endangered and threatened species.) I imagine it would be difficult to hunt a species into extinction using a bow and arrow, but an assault rifle certainly lowers the hurdle.

The rules have changed and so must our behavior. The opposite appears to be happening in the Solomon Islands, whose "traditional currency is gaining in prominence now after years of ethnic strife that have undermined the country's economy and rekindled attachment to ancient customs."

Which brings me to the other facet of this interesting article that caught my fancy: commodities as currency. I've never been a fan of the gold standard (despite my praise of Ayn Rand). Obviously, I also frown upon the use of dolphin teeth as a monetary medium. Cruelty issues aside, I just don't see how it makes sense to arbitrarily link an economy's monetary base to the supply of a commodity subject to its own fundamentals and market dynamics. What happens when the islanders run out of dolphins to slaughter? Holding demand constant, the diminshed supply would result in a higher equilibrium price (in terms of real buying power) for dolphin teeth. In other words, the market for goods and services would experience deflation (prices would effectively come down as a dolphin tooth fetched more goods than before).

Then again, perhaps this society of dolphin killers would be getting what it deserved.

For the Nonce

• The album "Now Playing" in my iPod
  
• The book within reach of my bed
  
• The object of my digression
  

Where Have All the Cowboys Gone?

Mark Gimein, a “New York-based writer” (read: non-economist) cites and explains the shortage of available, appealing men in society, though he offers no evidence of this supposed scarcity:

The problem of the eligible bachelor is one of the great riddles of social life.

But why prove a claim when you can simply state it and move on? Well played, Mark.

Anyway, for the sake of argument, let’s assume Mark’s premise holds water – there are fewer attractive, intelligent men in the singles market than we’d expect to observe. The next assumption he asks the reader to make is that women ultimately decide whom and when to marry. Mark does offer one caveat, admitting “this is simplified — in contemporary life, both sides get plenty of chances to be selective…but as a rough-and-ready model, it's not bad.”

Yeah, but it ain’t all that great either, Mark. But I’m getting ahead of myself…

Next we’re asked to consider courtship and marriage in terms of game theory:

You can think of this traditional concept of the search for marriage partners as a kind of an auction. In this auction, some women will be more confident of their prospects, others less so. In game-theory terms, you would call the first group "strong bidders" and the second "weak bidders."
…
[G]ame theory predicts, and empirical studies of auctions bear out, that auctions will often be won by "weak" bidders, who know that they can be outbid and so bid more aggressively, while the "strong" bidders will hold out for a really great deal.

In other words, as unattractive women (“weak bidders”) marry hapless, yet handsome men, the population of eligible bachelors shrinks, while more endowed females (“strong bidders”) who wait for Mr. Right find themselves surrounded by other attractive women and face a dearth of suitors.

Where have all the most appealing men gone? Married young, most of them—and sometimes to women whose most salient characteristic was not their beauty, or passion, or intellect, but their decisiveness.

Does this scene bear any resemblance to reality? Before you answer, allow me to make a prediction. If you’re female, the answer is a resounding “YES,” while if you’re male, it’s the polar opposite. Rather than fan the flames and turn this into a gender feud, let’s take a step back and revisit Mark’s underlying assumptions.

First, do women really have sole discretion over the decision to wed? Perhaps in a Jane Austen novel (though doesn’t the father have to give the daughter away?) but not in today’s world. Mark hints at the weakness of this assumption, which is really the crux of his argument (as we’ll see in a second), but is too quick to dismiss the inherent flaws.

If we relax this constraint (that women monopolize matrimony) Mark’s already contrived connection to game theory is broken. Men and women no longer find themselves in an auction. “Weak bidders” are unable to snatch up unsuspecting blokes and instead enter a market where contracts (wedding vows) are negotiated at arm's length and outcomes are more efficient and equitable.

Are men (eligible or otherwise) indecisive drones waiting for an unattractive, over-eager woman to lead them down the wedding aisle? Hardly. First, men place a great deal of emphasis on physical appearance, which makes a “strong” man and “weak” woman pair seem unlikely. Moreover, one could even argue that an attractive man, able to command the affection of myriad partners, would have an incentive to defer marriage as long as possible. Why buy the cow when you can get the milk (in numerous flavors) for free?

I’m very disappointed in this article and it would appear I am not alone.

An Assortment of Links

• Getting bang for your buck: a shopper's guide to pesticides in produce
  
  
• Peter Thiel gives us an "Optimistic Thought Experiment"
  
  
• On the lighter side -- a friend submitted my relative value trade idea to LSC. I remain long avocados.
  

How Low Can You Go?

At the risk of sounding utterly snobbish, a confession: as an agnostic, apolitical citizen of San Francisco, I seldom find myself interested in the capricious stories hocked by the media. (Tainted Chinese dog food?) It being an election year is a clear exacerbation.

But there is one topical item I unfortunately find all too relevant – the recession (GOOG news reports 70,773 search results for the word today).

The idea of recession has always intrigued me. Why should the myriad participants in an entire economic collective decide in unison to stop working and start saving? Explanatory theories abound, but my understanding is most economists agree recessions occur when, in response to some exogenous shock, people attempt to stockpile cash. The system breaks down when I hoard my $1 and forego buying that coffee (OK, so perhaps $2 would be more realistic) which means you, my friendly coffee purveyor, will not have a dollar (less the applicable costs of production) to hoard yourself.

So what’s the solution?

Again, it would depend upon whom you ask. Most would agree, however, that if the general price level declines (ie, prices deflate) the economy would regain its vigor. Deflation has the effect of reducing the incentive to hoard cash – it’s possible I’ll resume my morning caffeine splurge if it’ll only cost me $0.50. What’s interesting is that the (non-nominal) economic reality pre- and post-price adjustment remains constant: I’m buying the same cup of coffee in both scenarios. Prices merely change to satisfy the whimsical want for cash. (Or do they? Menu costs and the “stickiness” of wages tend to create a price floor, but this concept is worthy of its own post.)

Though an avid coffee consumer, I find I’ve more in common with the coffee vendor than vendee in the above metaphor. A while back (before headlines of recession hit the wire) I decided to sell my car, which I purchased about 18 months ago to permit semi-monthly visits to Santa Rosa. Much to my parent’s chagrin, I’ve since slowed my rate of visitation (I’ve been home once so far in 2008) and I find it difficult to justify owning a car.

Alas, I’ve had no luck in finding a buyer (please email me if you’re interested in a FANTASTIC vehicle) and find myself in the downward spiral of price discovery. It’s a game of limbo and luckily I have a decent amount of financial flexibility. Still, I’d sure like to clear that bar soon.

Connecting the Dots

While driving through the orderly chaos that is Chinatown this afternoon, I noticed a banner hanging before a nondescript storefront. It read: "HALF OFF ALL DOG AND CAT FOOD"

Conventional Wisdom, Conventionally Wrong

I was struck by a WSJ editorial I came across yesterday. The piece, published in 2007 by Matthew Slaughter of Dartmouth's Tuck School of Business (hi, John G.) sheds light on China's alleged trade advantage, commonly attributed to its currency manipulation.

The argument made by Hank Paulson (and a slew of Rust Belt Congressmen) goes something like this: by intervening and aggressively purchasing dollars, China is keeping its currency -- the renminbi -- below the equilibrium price a competitive market would establish. This in turn makes Chinese goods less expensive than American equivalents. Thus, the hollowing of America's manufacturing core (or an equivalent politically-charged metaphor).

Seems fairly straightforward. So much so, I'd posit this concept has become common knowledge, conventional wisdom. Of course, we all know the correlation between conventional wisdom and reality isn't all that high -- remember, the world was flat up until the 15th century (despite what Thomas Friedman might have you believe).

The key to debunking this myth lies in basic economic theory, as articulated by Slaughter.

The exchange rate that matters for trade flows is the real exchange rate -- the nominal exchange rate adjusted for local-currency output prices in both countries. Supply-and-demand pressures in international markets can, and do, alter not just nominal exchange rates, but also nominal prices for goods and services. And these pressures driving the real exchange rate, in turn, reflect the deep forces of comparative advantage such as cross-country differences in technology, tastes and endowments of labor and capital.

If an under-valued currency makes Chinese goods more affordable for Americans, it does so for all (American) market participants. In other words, the weak renminbi increases total demand for Chinese wares, putting upward price pressure on these products in terms of their local currency. Your dollar might fetch too many renminbi than it ought to, but thanks to market dynamics those renminbi will buy fewer goods.

While the issue of China's currency policy is far from moot, it certainly doesn't deserve the attention it receives from Hank, Congress and the media.

I'd like to spend more time contemplating the roll China's large stash of USD-denominated assets plays in this story. If they're sitting on north of $1 trillion in US Treasuries (not to mention the equity in Morgan Stanley, suckers) how powerful is China's incentive to keep the dollar nominally strong and does this compulsion create real inefficiencies?