Monday, October 26, 2020

How would Tony Soprano cope with a pandemic?

When The Sopranos was running I never watched it, but during the pandemic I finally had some extra time to give it a try. It was excellent. As I watched I kept wondering how Tony Soprano would have tried to pull his business through COVID-19. Below I've adapted two scenes from Season 4, Episode 1 to incorporate the problems a mob family might be experiencing in 2020. 

Before you read the adaptation, you may want to check out my blog post How the pandemic has clogged the global economy with paper currency. In short, there has been a huge buildup in cash in Europe, U.S., Canada, UK, Australia, Norway, and more. My hypothesis is that with money laundering avenues (i.e. casinos and restaurants) closing due to virus fears and lockdowns, criminals have no choice but to hoard huge amounts of incoming banknotes. And this has shown up in national banknote statistics.

This episode of the Sopranos is particularly ripe for adaptation because it is full of references to the economic difficulties experienced by the Soprano businesses during the 2001-02 recession.


Why's the Money Building Up?
Adapted from "For All Debts Public and Private"
Season 4, Episode 1 of The Sopranos (which aired in September 2002)
(Original script)


Tony Soprano plants a fifth scoop of ice cream in a bowl, adds Redi-Whip, M&M's. He takes his bowl to the den, jacks the volume on Rio Bravo, reclines and eats blissfully. Carmela Soprano, his wife, appears. She's wearing a mask. Stands there. He looks over.

TONY: You want some? Take that mask off. You're home now.
CARMELA: Can I talk to you a minute?
***He contains a sigh, nods. She sits, takes remote. Takes mask off, puts in purse.***
CARMELA: Can we turn this off?
TONY: Just turn it down.
CARMELA: (mutes it, then) I'm worried, Tony. About money.
TONY: So you're getting a little less allowance in your bank account. I'm giving you more cash instead.
CARMELA: Tony, our closet is filled with bills.
TONY: I told you, it's temporary. Just stop using your card.
CARMELA: And Meadow? 
TONY: What about her?
CARMELA: Her college only takes check.
TONY: Columbia is paid up till spring. After that, maybe I'll sell AJ.'s Xterra. It's this virus, it's slowing all the cash down.
CARMELA: It's not just that -- I'm worried about you. And about the future. About the kids and me if something happens to you.
TONY: I don't provide for you?
CARMELA: I saw Angie Bonpensiero today. She was handing out free Polish sausage at the super market. In the middle of a pandemic.
TONY: Don't start with that. I supported her long enough. You're so worried about money.
CARMELA: Who is going to support your children? And me? If god forbid something happens to you. Is Sil going to support me? Paulie? That's frightening.
TONY: (conversation over) You'll be taken care of.
***His eyes have drifted occasionally to the screen. She zaps remote; picture dies. He drops his spoon, lowers his voice.***
TONY: You're set in perpetuity. There's money in overseas accounts.
CARMELA: I don't have the serial numbers. Why?
TONY: You'll have them when the time comes. Not now. For your own benefit. So you're not an accomplice.
***She sighs, rubs her face.***
CARMELA: I'm talking about some simple estate planning, Tony. That's all. My cousin Brian Camaratta has helped a lot of people to set up living trusts for their kids, start asset allocation, wealth preservation...
TONY: I got to spell it out for you? We can't move all the cash we're takin in. The lockdown means our fronts are closed.
CARMELA: What about your consulting fees from Barone Sanitation? We file a tax return to justify the house, the cars, your boat. The virus hasn't slowed down the garbage, has it? We could be putting more cash through there and then putting some aside to start a portfolio.
TONY: Stocks? Heh-heh. You have to be high up in the corporate structure to make that shit work for you. We don't have those Senate-type connections. Besides, it's all going to crash when Trump loses.
CARMELA: Bonds then. Or these things called SPACs Brian told me about --
TONY: Bonds. Where's the capital for that?
CARMELA: In the Cayman's. Or all the cash in our closet -- wherever you put it at zero growth.
TONY: That money stays where it is. With this virus shit going on?
CARMELA: You always have an excuse.
TONY: The cash stays in this house. At least until we figure out how to move it again.
***Carmela stands angrily, heads out. Tony is angry and worried.***


Tony, Silvio Dante get out the rear of the car. Both take off their masks. Christopher Moltisanti gets out from driver seat. He keeps his mask and rubber gloves on.

A ring of chairs has been arranged at the far end of the Bada Bing's parking lot. The Soprano family captains are chatting: PAULIE, RALPH CIFARETTO, ALBERT BARESE, RAY CURTO, and CARLO GERVASI. Tony's appearance dampens the chit-chat. Uncertain, they step to him for the ritual kiss, but he holds up his hands. They back away and sit. Silence settles. Some coughing.

TONY: I want to know why this family's cash isn't moving.
TONY: Why's the fucking money building up?
***No answer; long faces. He surveys them.***
TONY: You're supposed to be the best. That's why you got the top tier positions. (Voice rising). All of you, everyone of you, need to go to your people on the street, and crack fuckin' heads!!
***Silence. He focuses on Albert.***
TONY: The guy -- we talked about this -- over in the other place, he had a banker at JP Morgan willing to take our stuff -- what the fuck happened to that?
ALBERT: It petered out.
TONY: It petered out.
ALBERT: It died on the vine.
TONY: It died on the vine?
ALBERT: It died on the vine. He got scared, the guy. Something about files. Finsin?
TONY: Are you all hearing this shit? Nobody knows what the fuck I'm talking about?
PAULIE: We hear you, T.
RALPH: If I can just say, Ton' - I was talking to Johnny Sack in New York, and he said over there too, there's --
TONY: I don't want to hear about fuckin' New York. This is here!
***Tony's voice breaks with emotion. Almost choking up.***
TONY: My uncle, the boss of this family, is on trial for his life. And what's being passed up to his kick is a fuckin' disgrace! You know how much lawyers cost. Major RICO like his? My house is full of cash, and here I am about to sell my boat! I shouldn't have to be coming here hat in hind, reminding you of your duty to that man!
RALPH: Ton', how are we supposed to clean the cash? No one's coming to the Bing no more. The Crazy Horse neither. They're afraid of the virus. We can't launder it all through Satriale's --
TONY: Don't tell me about the fucking virus! (to Silvio) Break it down for them, the two businesses that are traditionally recession-proof since time immemorial.
SILVIO: Certain aspects of show business and our thing.
***Tony lets it sink in.***
RALPH: (under his breath) Yeah, but this ain't no normal recession.
TONY: That's it. I got nothing else to say. Frankly, I'm depressed and ashamed.
***Terrible silence. He stares at the floor. They slowly file out. When everybody's gone except Paulie--***
PAULIE: I hear you T. 

The original videos for these two scenes are here:

Thursday, October 22, 2020

A very very simple explanation of monetary policy

Scale & weights | Aylmer, Quebec | Canadian Museum of History

This post is for my dad, who says he doesn't understand my writing but remains a loyal reader nonetheless.

I am going to try and explain one of the most important things that central banks do: monetary policy. We often see news clips in which bespectacled central bankers discuss their "inflation targets," or tell us that they are ratcheting interest rates up or down, or that they are engaging in "quantitative easing". The catch-all term that we use to describe what they are doing is monetary policy. But what does this mean? What is monetary policy?

Central banking is confusing, so here's what I propose. Let's find something simple, something we all intuitively understand. And then I'll show why monetary policy is like that simple thing. Hopefully that demystifies what is going on. I'm going to use a Canadian example, but it applies just as well to any nation.

K50, K75, and K106

People take their national system of weights & measures for granted. But we simply couldn't function as a society without a standard way of measuring things: kilograms, metres, seconds, or degrees Celsius.

A nation's system of weights & measures doesn't just manage itself. Take the kilogram. The Canadian Federal government had to push and prod for years to get the kg into popular usage. Canadians had historically relied on the imperial measurement system with its strange mix of ounces, drams and grains. In 1970, Pierre Trudeau passed the Weights and Measures Act, giving birth to the Metric Commission and its mandate to get Canada officially onto the metric system. Fifty years later we Canadians all reckon in terms of kilograms, grams, and a raft of other metric measures. (Ok, not entirely, I admit. I cook in Fahrenheit, not Celsius, and weigh myself in pounds, not kg. But I definitely don't drive in miles.)

The Canadian government's job didn't stop once the kilogram was widely accepted. It has continued to manage the kilogram ever since. The main thrust of this ongoing effort is to ensure that 1 kilogram is 1 kilogram all across Canada. No agency is more involved in this harmonization effort than the National Research Council of Canada, or NRC, the Federal government's research and development lab.

National Research Council building in Ottawa

The NRC's headquarters in Ottawa houses three individual physical kilogram weights. Known as K50, K75, and K106, these specimens represent Canada's official kilograms. Because Canadian manufacturers require incredible precision, they can periodically visit the NRC and calibrate their weights against K50, K75, or K106 to ensure accuracy. If the manufacturer's weights diverge by even a few micrograms from the NRC's official weights, they will have to be replaced with more accurate ones.

And so the definition of the kilogram diffuses across Canada, first from the National Research Council, then to industry, and finally to Canadians who consume carefully weighed products.  

The National Research Council's K50, K74, and K106 are in turn copies of the most important kilogram weight in the world, the International Prototype Kilogram. Manufactured in 1889, the IPK is stored at in the International Bureau of Weights and Measures (BIPM) in France. Scientists at the National Research Council used to periodically hop on a plane with K74 and fly to France to cross-check it against the IPK.

In 2018, the world stopped using physical artifacts to define the kilogram. The problem with using actual objects like the IPK and K50 is that over time they suffer from slight degradation. K50, for instance, began to display fluctuations of a few micrograms due to "tiny cracks in the surface which adsorbed and released water from the air." And so our standard for weight suffered. 

We now rely on a much superior non-physical standard for the kilogram, one that is defined in terms of Planck's constant. But even though the definition of the kilogram has changed, the National Research Council is still key in ensuring that the kilograms Canadians use are good kilograms.

The beginning of the long dash...

The National Research Council also maintains Canada's official time. Cesium atomic clocks are the world's most accurate method for recording the passage of time, of which the NRC's time standards office in Ottawa has several. The NRC broadcasts official time on the web, via short wave radio band, and by telephone. Faithful CBC radio listeners will all be familiar with the NRC's habitual: "The beginning of the long dash indicates exactly one o'clock..." For $7,500 per year, industrial customers can even get authenticated access to NRC time servers.

An NRC control room containing systems used to disseminate official time to the public, including the telephone talking clock, the CBC daily time broadcasts, and computer time clocks.

Precise timing is particularly important to the Canadian financial industry. Take the Investment Industry Regulatory Organization of Canada, or IIROC, which regulates the Toronto Stock Exchange and all the firms that deal on it. (IIROC is sort of like Canada's version of the SEC). To ensure that all market participants are on the same rhythm, IIROC sets its internal clock off of the NRC's clocks. All firms that trade in Canadian securities must in turn synchronize their clocks to IIROC's clock. And thus the NRC and its atomic clocks impose order on the chaos of the stock market. 

kg, s, and $

Now let's bring this back to monetary policy. 

The main suggestion in this article is that readers put the National Research Council and the Bank of Canada in the same bucket. Both institutions are responsible for upholding Canada's system of weights & measures. 

But whereas the NRC is in charge of managing physical measures, the Bank of Canada is responsible for managing the nation's key unit of economic measure, the $. So when you see news about the Bank of Canada and the dollar, and you start to get confused, consider reframing the news as if it was the National Research Council making policy changes to the way it manages the kilogram. Hopefully that will make the news more relatable.

The dollar is the universal sign we Canadians use to express economic value. It shows up in grocery aisles, at online stores, in our bank statements, and is used in our heads to calculate bills.

But like the kg, the $ must be managed. As I wrote earlier, the NRC originally defined the kilogram in terms of a physical artifact before switching to a non-physical construct. Likewise, a long time ago the Canadian dollar was set at 23.22 grains of gold. But these days the Bank of Canada (much like the NRC) measures the dollar in terms of a theoretical construct, a basket of consumer goods.

What does it mean to measure the dollar in terms of a basket of consumer goods? 

Each month government statisticians canvas store aisles and websites for price data which they use to calculate the cost of purchasing a basket of consumer goods. This data compilation is known as the consumer price index, or CPI. It includes items like groceries, rent, gas, etc. 

In its definition of the dollar, the Bank of Canada promises citizens that the $ unit will be capable of buying the same amount of consumer baskets from one month to the next. (It's a little more complicated than that, but that's for another post).

So then what are interest rates for?

Sometimes the Bank of Canada will make the news because it is increasing or lowering interest rates. What is happening here? Recall that the National Research Council had a number of tools for diffusing official time across Canada, one of which is broadcasting across channels such as the CBC. The Bank of Canada also has tools for diffusing its definition of the dollar across Canada. Interest rates happen to be its favorite tool.

If the dollar falls in value such that it is no longer powerful enough to purchase the appropriate quantity of consumer baskets, the Bank of Canada will increase rates. In theory, this pushes the dollar's purchasing power back up to target. And if the dollar is too powerful and purchases more baskets than the Bank of Canada's target, the Bank will decrease rates. This should nudge the dollar's purchasing power back down.

Updating the definition of $

So when experts discuss standards bodies like the National Research Council or the Bank of Canada, they are likely having two sorts of discussions. Half of their conversations will be about the definitions that these institutions uphold (i.e. should we define the kilogram using K50 or Planck's constant? Should we define the dollar in terms of grains of gold or consumer goods?). And the other half will be about strategies and tools for diffusing the standard across Canada (i.e. should we provide the public with more channels for accessing official time? Should we increase interest rates or keep them unchanged?)

The Bank of Canada is currently in the thick of the first sort of discussion. Every five years the Bank of Canada and the government come to an agreement about how the Bank will define the dollar for the ensuing five years. The next agreement is scheduled to be inked in 2021. 

Some people involved in this discussion want to adopt new definitions for the dollar. Recall that the Bank of Canada already uses consumer basket to define the dollar. One group wants to redefine the dollar in terms of nominal gross domestic product. Others want to add a reference to employment

Much like discussions about whether to redefine the kilogram in terms of Planck's law, this is a complicated debate, one that non-experts cannot easily access. But whatever the decision, you can be sure it will have implications for all Canadians. After all, the $ is a measure that each on of us uses on a daily basis.

Sunday, October 4, 2020

The ECB's digital euro: anonymous or not?


The European Central Bank (ECB) recently published a report that explores the idea of introducing a digital euro for use by the general public. This project is known as a central bank digital currency, or CBDC, and many other countries are exploring the same idea. John Kiff has a useful database here showing how far these projects have progressed.

Will the ECB's new euros-for-all be relatively open and anonymous like cash? Or will they require ID and permission like a bank account?

In short, the report says that anonymity may have to be "ruled out." It says that regulations do not allow anonymity in electronic payments, and the ECB must comply with regulations. I quote the passage below:
"While [anonymity] is currently the case for banknotes and coins, regulations do not allow anonymity in electronic payments and the digital euro must in principle comply with such regulations (Requirement 10)."
But I'm pretty sure the report is wrong on this. EU regulations do allow for anonymity in electronic payments. The Fifth EU Anti-Money Laundering Directive (AML5) exempts issuers of e-money/prepaid cards from collecting customer information as long as long as fixed monetary thresholds aren't exceeded. Yes, these exemptions are very small:

Source: Paytechlaw

So if the ECB believes that it must comply with existing regulation for electronic payments then surely a digital euro falls under e-money law, and thus it can have some anonymity. (Jerry Brito has pushed back on the first assumption, asking why a CBDC can't just occupy the same legal framework that has already been created for banknotes.)

By the way, the U.S. and Canada also provide such exemptions. That's why people can walk into a pharmacy and get a $200 Vanilla prepaid debit card without showing any ID and, say, buy food online for delivery. Or to make an anonymous donation.

Putting aside for the moment the ECB's views about payment anonymity, an interesting question is why democracies allow for small amounts of payments anonymity in the first place. 

On Twitter, we talk a lot about the civil liberties case for anonymity i.e. the right to stay anonymous. But that's not why regulatory exemptions to all-pervasive know your customer obligations exist. They exist because of political appeals to financial inclusion. Disadvantaged people often lack ID. To ensure that these people aren't locked out of the digital payment system, electronic money & prepaid card issuers are allowed to avoid collecting information when the amounts held are small.

So let's bring the conversation back to the ECB's report on a digital euro. Yes, the report did wrongly state that it can't legally provide anonymity. And yes, we can chide the ECB from a civil liberties perspective for not wanting to activate a feature for which it has legal right.

But given my earlier point about financial inclusion, a better critique is this:

The EU has chosen to build an anonymity exemption into payments law in order to ensure that all Europeans, including those without ID, can make digital payments. Why is the ECB choosing to avoid exploiting this exemption? In the very same report, after all, the ECB states that the decline in cash could "exacerbate financial exclusion for the 'unbanked' and for vulnerable groups in society, forcing the central bank to intervene." Isn't the ECB contradicting itself by saying that it wants to help the vulnerable while simultaneously refusing to activate a feature—anonymity—that might help reach this demographic?

Central banks such as the ECB are sailing into dicey political territory by choosing to pursue a new retail payment product. Who are they trying to serve, and why? More controversially, who are they choosing to not serve? Anonymity (or its lack) will be one of the most contentious design elements of a potential digital euro. Let's hope the ECB does a better job discussing this particular issue in the future. In this recent attempt it could be construed to be ducking behind non-exist laws rather than directly engaging with a tricky topic.

By the way, I understand why the ECB might not want to provide anonymity. The exemptions that AML5 permits are tiny. Is it even worth if for the ECB to exploit them? And let's face it, anonymity can attract bad actors. Due to their relative anonymity, iTunes and Steam gift cards are being repurposed by IRS and Social Security scammers as a safe way to extort payments from their victims. And ransomware operators have converged on bitcoin as a safe way to extort ransoms.

Balanced against the dangers of anonymity are peoples' very legitimate concerns about civil liberties and financial inclusion. It's a tough issue. I don't envy the ECB.