2023 Mar 19

• Continuing to understand the Age of Easy Money

• Did cryptopals challenge 25. If the attacker has access to an AES CTR encryption oracle that reuses the same nonce and key (where it can provide the input and get a ciphertext), they can simply find the keystream by providing an input of all zeroes.

  • I’ve come to the conclusion that for AES CBC you need to include the initialization vector with the ciphertext (and same with CTR and the nonce). The receiver needs this information to decrypt, and yet as long as you use a different IV or nonce with each message (which is very likely if you just choose randomly), even if an attacker has access to the ciphertext with IV or nonce, they will not be able to decrypt (because they don’t have the key). In cryptopals and in the wikipedia descriptions of implementations there not super explicity about this so I realized I haven’t really followed the protocols completely correctly.

• How it happened

  • 2008 financial crisis happened because for the most part (simplifying), banks were playing too risky and not doing their due diligence. When that risk faultered, everything crashed.

  • Government bailed out the bigger banks as one way to help.

  • Importantly the fed stepped in with quantitative easing, which was where they introduced new money in order to buy assets (government bonds, corporate bonds, mortgage backed securities, etc.) and lower interest rates in order to inject money into the markets to inflate things, i.e. encourage people to consume. Quantitative easing was radical and experimental. It seemed like it was working because prices were inflating, but in reality, the money wasn’t being lent to small businesses or making companies employ more people, it was just encouraging banks to purchase assets and ride the inflation wave.

  • Once they stepped in with quantitative easing, it was hard to stop. They tried to “taper,” i.e. pull back on quantitative easing, but markets started to panic and throw a tantrum. The fed crumpled from the reaction. Went back to more easing. Meanwhile the QE was not actually getting any money to the middle and lower class.

  • Eventually the fed pulled back a little bit, but only slowed QE, not actually reversing it.

  • Jerome powell was put into office. He tried to do quantitative tightening, markets again through tantrum, so back to easing. Easy money became the norm, and it changed everyone’s time preference to be very high, i.e. they value the short-term much more.

  • The result? The tech bubble: totally overvalued companies, companies emerging that burn tons of cash before turning a profit. Private equity firms start buying everything up, and because the short-term is so much more valuable, they’re incentivized to do things that are cheap to drive up selling prices in the short-term rather than more profitable in the long-term (and you’d imagine this would entail more actual value creation). This also led to buy backs, where instead of investing in their workforce or infrastructure or any actual productivity growth, companies would just buy back their stock to drive up the price and pump their shareholders’ bags.

    • Private equity was especially influential on housing. Build cheap that looks alright to min-max selling in the short-term. This excerpt struck me a while ago, making me think what’s wrong with capitalism? But it’s really more of a problem with easy money and high time preference.

      • Hmm, but how does hard money incentivize against this (does it even?)? When money is harder to come by (debt is less common), and money holds it’s value, debt is riskier, and you are incentivized to prioritize the long-term, i.e. you are incentivized to invest in actual sustainable growth as opposed to maximizing profits in the short-term at the cost of meaningful improvements to productivity. It’s still possible to do these short-term shenanigans, but it will be much less common when money is actually aligned with value.

      • The biggest thing about hard money is just that when money holds it’s value, you are less inclined to spend unless what you are purchasing is actually reflective of the value you’re getting from it.

      • This goes for lending as well, as lending is essentially purchasing an asset, that you are taking a risk on expecting it to appreciate.

  • This turned into this dependency between the banks and the fed. The banks hold everyone’s money, and they invest large portions of it in the market (or lend it out). If markets are down too much, it means normal people’s wealth is endangered. Ever since the fed has turned on QE, they’ve essentially been largely responsible for the markets doing so well, so if they try to reverse it, the market throws a tantrum. This incentivizes the fed to never let the markets crash, and so inflation soars onward.

  • So many different things I’ve come to see wrong with the world are really connecting from understanding these macro trends.

• Fractional reserve banking is okay. But the risk that is being taken today, and government bailouts not allowing markets to correct themselves (encouraging more risk) is dangerous.

• Some remaining questions:

  • How risky did banks play before bretton woods? What regulations are there on how risky banks can play, and also the reserve ratio?

• grok: to understand profoundly through intuition or empathy. Great word.

• The whole thing:

  • Stems from two things:

  • Storing money in banks for security. Fractional reserve banking. Paper money. Government takeover.

  • Before the dollar, there was gold. Most people stored their gold in banks for security. Gold was not easy to transport, so when people wanted to use gold as a medium of exchange, the banks issued notes.

    1. Banks have been our only way, and therefore the gatekeepers, to secure our wealth and access digital payments.
    2. Gold was not salable through space, so when people held their gold in banks, the banks issued notes for people to use as a medium of exchange. At a certain point, governments took control over the issuance of these notes, as well as the interest rates that banks could lend at (when why how did they do this?).