The ECB and the Davies Folk Theorem

by Henry on November 18, 2011

“Mario Draghi”:http://www.ecb.europa.eu/press/key/date/2011/html/sp111118.en.html

bq. Let me use this occasion to dwell a bit further on monetary policy in the current environment. Three principles are of the essence: continuity, consistency and credibility. Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term. Consistency means to act in line with our primary objective and with our strategy both in time and over time. Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence. Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.

“Daniel Davies”:https://crookedtimber.org/2006/11/29/reputations-are-made-of/ (on the Iraq War, but trust me – the logic travels).

bq. At this late stage in the occupation of Iraq, many of Henry Kissinger’s old arguments about Indo-China are being dusted down. One of the hoariest and worst is that we need to “stay the course” (or some similar euphemism) in order to maintain “credibility” – to demonstrate our resolve to our enemies, who will otherwise continue to attack us. It reminds me of my one and only contribution to the corpus of game theory.

bq. The Folk Theorem in game theory states that any outcome of a repeated game can be sustained as an equilibrium if the minimax condition for both players is satisfied. In plain language, it can be summarised as stating that “if we take strategic considerations into account, there is a game-theoretic rationale for practically anything”. This formulation leads on to my contribution, the Davies-Folk Theorem, which states that “if we take strategic considerations into account,there is a game-theoretic rationale for practically fucking anything” (it’s a fairly simple corollary; proof available from author on request).

bq. The point being that since game theory in general provides the analyst with so many opportunities to twist himself repeatedly up his own arse like a berserk Klein bottle, if a given real-world course of action appears to have nothing going for it other than a game-theoretic or strategic justification, it’s almost certainly a bad idea. Thus it is with that bastard child of deterrence, “credibility”.

bq. … The idea is that the war is costing huge amounts of money and lives with no real prospect of success and a distinct danger that it is making things much worse. However, to do the logical thing would send the signal to our enemies that we will give up if fought to a pointless bloody standstill. Therefore, for strategic reasons, we must redouble our efforts, in order to send the signal to our enemies that we will fight implacably and mindlessly in any battle we happen to get into, forever, in order to dissuade them from attacking us in the first place. It’s got the kind of combination of “counter-intuitive” thinking and political convenience that always appeals to the armchair Machiavelli, as well as to the kind of person who thinks it’s witty to describe things as “Economics 101” (Airmiles has been all over this one for ages, naturally). What’s it like as a piece of game-theoretic reasoning?

bq. Lousy. It is certainly true that one of the benefits of doing something stupid is that it saves you from having to spend money on maintaining your reputation as an idiot. However, is the reputation of an idiot really worth having?

bq. It turns out that it can be proved by theorem that the answer is no. If the game of being a belligerent idiot with no sensible regard for one’s own welfare _was_ worth the candle, in the sense of conferring benefits which outweighed the cost of gaining it, then everyone would want to get that reputation, whether they were genuinely an idiot or not. But if everyone wanted that reputation, then everyone would know that simply acting like an idiot didn’t mean that you were one, in which case it would be impossible to establish a reputation as an idiot in the first place. The point here is that it’s one of the more important things in game theory that a signal has to be a _costly_ signal to be credible; like membership of the Modern Languages Association, a reputation in deterrence theory is something that is worth having, but not worth _getting._ People who use the word “signal” in this context (usually on the basis of a poorly understood or second-hand reading of Schelling) don’t always seem to realise that they are explicitly admitting that the costs of being in Iraq are greater than the benefits.

{ 75 comments }

1

bert 11.18.11 at 4:15 pm

Krugman had a recent post where he quoted himself discussing monetary policy credibility back in 1998. He argued that in a liquidity trap, the question of credibility can flip 180 degrees, so that a successful policy can come to rely on rational actors expecting monetary irresponsibility. Follow dsquared and apply that to foreign policy, and you might end up with something like the Nixon/Kissinger Madman Theory.

2

SamChevre 11.18.11 at 4:20 pm

I still think dsquared is wrong (I thought so then too).

The question in both cases is, in my opinion, the time horizon and discount rate. Credibility is a long-term strategy; like almost all long-term strategies, there are short-term costs for long-term benefits.

3

bert 11.18.11 at 4:21 pm

I’m all for a bit of inflation, btw.
As long as it’s not an alternative to creditors taking something of a hit.
Without it, wage/price adjustments inside the eurozone will test voter exhaustion to the limit, and likely beyond.

4

Latro 11.18.11 at 4:41 pm

The point of the text, and one I agree with, is, what is the benefit of being know as a reliable cretin that will keep screwing up in the same way time and again just to be “credible”.

In fact I would consider that a negative in a strategic, game-theory way. Your enemy know now that you are incapable of acting in your best self interest and, when put into a quagmire, would try to dig a trench on it.

5

Gene O'Grady 11.18.11 at 4:44 pm

I yield to no one in my contempt for Kissinger, but that stay the course for credibility in Viet Nam thing, garbage that it was, wasn’t his and was commonly heard before he reared his ugly head.

6

Watson Ladd 11.18.11 at 4:52 pm

No, the benefit of credibility is it enables you to make threats and promises that are believable, which is a big benefit in games. Why do gangs kill snitches knowing that this brings the police down like a ton of bricks? Because killing snitches makes the treat of killing snitches credible, and so you can be sure that they won’t defect to the police. Likewise, if your threat is of military force you need to be willing to use it. Making empty threats repeatedly makes them useless.

7

Latro 11.18.11 at 5:00 pm

So, if we get a credible reputation of wasting money and life on useless wars that leave us worse than we started instead of cutting loses when it is shown that it is a waste, it gains us the credibility that we will waste our money and life on useless wars that leave us worse than we started. Which is useful in… something.

I seem to remember that something similar killed the USSR, the incapacity of scaling down for a Cold War that was more cost than benefit. Till there was no more to pay the cost and the credibility disappeared along with the player.

8

mpowell 11.18.11 at 5:06 pm

I don’t know if this is supposed to be a discussion about dsquared’s argument or Draghi’s. The point I would like to make is that when the ECB’s disastrous policy eventually leads a slew of countries (including Italy) to leave the Euro and reassign their sovereign debt formerly in Euros to their own national currency, the Euro will have lost credibility. This is the end game these fools are driving towards.

At the same time, are there any actual examples of what Draghi is implicitly claiming: a central bank struggling to bring inflation under control? Or a central bank creating a long lasting recession in order to do so? I am aware of no actual examples of this happening so if someone has any, I’d be pleased to hear about it. And if your example is Weimar Germany or Zimbabwe let me just warn you in advance: you have misunderstood the question and I am not interested in your (badly flawed) perspective.

9

Bloix 11.18.11 at 5:12 pm

“Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term”

To slide away from the game theory analogy for a moment, in the short term, Italian credibility rests on the belief of investors that it will not default. INvestors right now don’t have that belief.

That is, the price of Italian paper is not falling because Italy’s monetary policy creates inflation risk. Italian paper is denominated in Euros and Italy does not control monetary policy in the Euro zone. The ECB controls monetary policy and its position is that it will not buy Italian paper because it believes that to do so would risk inflation.

The price of Italian paper is falling because of default risk. And that risk is caused by the fact that – yes, the same fact – Italian paper is denominated in Euros and Italy does not have its own central bank that can print its own currency.

So if a “successful monetary policy” means one that runs no risk of inflation, it appears to mean a monetary policy that requires Italy to default.

10

cian 11.18.11 at 5:12 pm

Why do gangs kill snitches knowing that this brings the police down like a ton of bricks?

Good lord, so many reasons. I kinda doubt that its a cool and rational decision made using game theory theorems though. On the whole I’d guess its more along the lines of “THAT F***ER”, based solely on my limited experience of the criminal underworld. Or more rationally a fear that he might testify against them. Anger, tempers, passion – things that don’t fit into game theory. One reason for it being largely bollocks.

11

cian 11.18.11 at 5:14 pm

At the same time, are there any actual examples of what Draghi is implicitly claiming: a central bank struggling to bring inflation under control?

Brazil might be one, though I don’t know enough about it to know. I’d be interested in an informed answer either way, though.

12

Omega Centauri 11.18.11 at 5:16 pm

I think it becomes rather complicated and confusing. Compare Watson @6, which is a clear argument that if you can be percieved to be a madman, people will be careful not to anger you. But Latro @7 is a good introduction to the opposite point, if someone wants to damage you, they can use your own logic about credibility (how does this differ from the Asian concept of saving face?) to trick you into a quagmire, from which your logic will not allow you to disengage.

Frankly I think Kissengers argument is really just an excuse to endulge the psychological (and political) imperative, to not admit to past mistakes. The previous investment (of lives/money/reputation whatever) cannot be admitted to have been a mistake, because that would be too painful to admit. So to avoid the pain of admission of a terrible mistake, you have to continue to make the same mistake.

13

cian 11.18.11 at 5:17 pm

Surely part of the problem here is that the premise is insane. Europe is not facing by any stretch of the imagination an inflation problem. At most there is a commodities boom, but that’s not a problem you can cure with inflation.

So how much credibility do you gain by signalling to the world that you are completely clueless about what is happening? And who exactly is he supposed to be signalling this info to. The markets aren’t worried by interest rates, they’re worried by the risk of default. Which the ECB is, um, increasing.

14

ed 11.18.11 at 5:21 pm

The question in both cases is, in my opinion, the time horizon and discount rate. Credibility is a long-term strategy; like almost all long-term strategies, there are short-term costs for long-term benefits.

Shortterm costs.

One cannot help but wonder what the time horizon is for the Iraq Invasion. Anyone know? And does Donald Rumsfeld’s personal rate of discount differs from Samar Hassan’s? How about credibility? Anyone know if Dick Cheney was proved fucking right about invading Iraq or, as is typical with long-term strategies, is it too soon to tell? Thanks in advance.

15

Tom M 11.18.11 at 5:33 pm

The Iraq strategy as a parallel to Vietnam was(to me) slightly different and exemplified by a WSJ cartoon. The bright young lad shows the CEO a plan to turn around the business and the CEO says: we can’t do that, we’ll look like idiots for not doing it sooner.

16

Barry Freed 11.18.11 at 5:41 pm

Remember the Ledeen doctrine? “”Every ten years or so, the United States needs to pick up some small crappy little country and throw it against the wall, just to show the world we mean business.”

17

Lemuel Pitkin 11.18.11 at 5:49 pm

The Davies theorem is correct, and time horizons have nothing to do with it.

At time t+1, I will take either action A or action B. My commitment as of time t-1 to take action A, is credible if and only if, having made the commitment, I then take action A at t even if the net benefit of B would be greater according to the metric I use. In this sense, it’s actually easier to establish credibility if your time horizons are short, since you only have to take actions that are costly in the short term. If you are known to have long horizons, you can only establish credibility through actions that are costly over the long term — you would have done the short-term-cost/long-term-benefit stuff even if you hadn’t committed to it, so it doesn’t do anything to show that your commitments are reliable.

By the same token, if there are long-term benefits to credibility, that in itself makes you less credible. The person who tells the truth just because, is more trustworthy than the person who tells the truth to get a reputation for honesty, because the latter person will always be asking if the benefits to lying in this case outweigh the hit to their reputation. The most trustworthy person is the one who has nothing to gain from being seen as trustworthy (or at least shows no sign of caring about it.)

It should be added that while maintaining credibility is a bad motivation, especially for starting wars or raising interest rates, actually being credible is a very good thing. You just shouldn’t want to get anything out of it. “But thou, when thou prayest, enter into thy closet, and when thou hast shut thy door, pray to thy Father which is in secret…”

18

Barry 11.18.11 at 5:58 pm

Watson Ladd 11.18.11 at 4:52 pm

” No, the benefit of credibility is it enables you to make threats and promises that are believable, which is a big benefit in games. Why do gangs kill snitches knowing that this brings the police down like a ton of bricks? Because killing snitches makes the treat of killing snitches credible, and so you can be sure that they won’t defect to the police. Likewise, if your threat is of military force you need to be willing to use it. Making empty threats repeatedly makes them useless.”

In this case, the act is killing a snitch when the snitch can do (at the most) minor harm, which is nothing compared to the harm that bringing the police down like a ton of bricks will do.

19

Tim Wilkinson 11.18.11 at 6:04 pm

So game theory can justify anything, if we take strategic considerations into account; but also a strategic game theoretic justification for ‘staying the course’ in Iraq fails. So that’s bollocks then.

Because of course some short term ‘costs’ can be justified in order to establish expectations in an iterated game (e.g. Tit-for Tat strategy in iterated PD). And this is one of the most important single ideas in game theory, and one of the few that undoubtedly translates into real life.

If willing to appear somewhat humourless, one can also point out that the reputation sought by being implacable even at some short-term cost is a reputation for implacability, not stupidity. In fact to moderately sophisticated adversaries it may well be a reputation for rational, strategic implacability, i.e. implacability without stupidity.

(Cian is shurely mistaken that retaliation in gang culture rarely involves calculated rules about deterrence. Organised crime is an excellent place to find examples of unconstrained reasoning, just like – and I mean just like – realist international relations. It can of course be a bit tricky to disentangle what is deliberate, what is instinctive but rational, and what is just a lucky – or self-selecting – character trait.)

Tediously enough, it comes down to the specific parameters of whatever model we are using as a schematic illustration of the decision. find myself agreeing with Sam Chevre and Watson Ladd!

That’s why these arguments fail in the case, e.g. of Iraq – because the numbers did not in fact add up (if we fondly imagine that the numbers in question are related to something like the general welfare of US citizens, anyway.)

20

Tim Wilkinson 11.18.11 at 6:23 pm

Lemuel P – I think the problem here is the no-pain-no-gain thesis, you can only establish credibility through actions that are costly . That’s not really the case, is it?

Certainly the arguments here are primarily about not losing credibility rather than about gaining it. And does one suppose one’s opponents (the strategic ones) to apply a principle of indifference when faced with uncertainty? That could be enough to give one sufficient credibility without incurring costs (cf Tit for Tat), until someone does something which requires a certain response if one is to retain credibility. At that point, in applying – possibly costly – retaliation, one (schematically speaking) decides what has highest expected value – if that’s retaliation, then one retaliates.

21

Jeffrey Davis 11.18.11 at 6:26 pm

The rationale — credibility/consistency — is why there are so many screaming children in airplanes and restaurants. Some people make bad choices and stick with them. Some make good choices and stick with them.

22

Lemuel Pitkin 11.18.11 at 6:28 pm

I think the problem here is the no-pain-no-gain thesis, you can only establish credibility through actions that are costly . That’s not really the case, is it?

Oh but it is. When I do something that fulfills a promise, it only only carries information about the reliability of my promises insofar as it’s not something I would have done anyway.

Now, what you’re saying is true insofar as there’s a baseline presumption that people’s promises are credible. Which there often is, but that only pushes the problem back a step. Capitalism and the state both freeride on human sociability.

23

Tim Wilkinson 11.18.11 at 6:33 pm

As an implacable psychopath I’m quite happy to freeride on anything going.

24

ed 11.18.11 at 6:36 pm

I think the problem here is the no-pain-no-gain thesis, you can only establish credibility through actions that are costly . That’s not really the case, is it?

It is the case just as long as SamChevre, Megan McArdle, Tom Friedman, David Brooks, et al incur none of the costs (or even benefit by somehow–somehow–becoming more credible or at the very least “credible”).

25

SamChevre 11.18.11 at 6:58 pm

For an example of a severe recession as a cost of shifting inflation expectations downward, I think the 1979-1982 recession in the US would qualify.

26

Tim Wilkinson 11.18.11 at 7:06 pm

Your credibility is, it appears, good enough until someone defies you (or is likely to do so?) – at which point you are in danger of losing credibility, and must decide what to do.

The argument is sophistical so far as it says ‘you can only gain credibility by diverging from rationality’. Of course, appearing to be irrational – in a specific way – can be an excellent game theoretic move, but being irrational, not so much. Basically, what we have is an argument saying that prioritising credibility over expected value is not a good way of maximising expected value.

27

Tim Wilkinson 11.18.11 at 7:08 pm

Those two paras not connected.

28

cian 11.18.11 at 7:20 pm

Cian is shurely mistaken that retaliation in gang culture rarely involves calculated rules about deterrence.

My point was more that it varies a lot. I kind of wonder whether it is expensive to kill a snitch. It doesn’t seem hugely likely that it would be in most cases.

Gang warfare is a better example. Gang warfare I could have accepted. There are costs on both sides – not to mention that will bring the police in like a ton of bricks.

It can of course be a bit tricky to disentangle what is deliberate, what is instinctive but rational, and what is just a lucky – or self-selecting – character trait.

Which of course would mean that game theory wouldn’t come into play, wouldn’t it. If I kill you because I’m angry – then you can argue that there were good game theory reasons for me to do so, but it doesn’t mean game theory had anything to do with it.

The thing about Iraq was what did it prove. That the US would just behave viciously in an irrational manner, at great cost to itself. Okay. What lesson did countries learn from that – basically, that you need a nuke, because nothing else you’re going to do will make a difference to the bastards.

And what lessons are likely to be learnt from the ECB. That basically, they’re insane.

29

Tim Wilkinson 11.18.11 at 7:30 pm

cian – Yes, I’m not defending any actual course of action, especially not any of thsoe under discussion here – the OP was after all invoking a theorem.

If I kill you because I’m angry – then you can argue that there were good game theory reasons for me to do so, but it doesn’t mean game theory had anything to do with it Indeed. Though game theory might explain why anyone who gets to be big boss would (probably) have to exhibit that behaviour pattern for whatever reason.

A bit distracted here, didn’t really make clear that in you can only establish credibility through actions that are costly, ‘costly’ seems to mean ‘irrational’. (Abstracting from the possibility of simulating systematic irrationality here.)

30

Bloix 11.18.11 at 8:10 pm

One example of a tactic that has short-term costs but long-term credibility is the strike. It’s rare that a long strike results in a contract with wage increases high enough to compensate workers for the weeks without pay. But over the long term, a union that can’t credibly threaten a long strike is one that can’t bargain effectively for wage increases.

Of course, in the US we don’t have unions that can credibly threaten to strike anymore, which is why this example hasn’t occurred to anyone yet.

31

cian 11.18.11 at 8:33 pm

I wonder if part of the problem is the ambiguity in the phrase: “staying the course”. Two situations:
1) Staying the course, even though its costly, because the strategy is worth it.
2) Staying the course, even though its costly and when it achieves nothing, or makes your strategy worse

Now you could make the argument that (1) applied to Vietnam. If the situation was that basically ignore US plans for your country, and you get your country destroyed – then hey, it made sense up to a point. Even if the US pulled out, what rational country would want that to happen to them? (followed by years of economic/international isolation). That’s your gang boss wiping out the entire family of a snitch, or Moscow bombing Georgia. Wildly out of proportion – but that’s the point.

But I think Iraq is an example of (2). It was based upon a flawed/mistaken strategy, made (frankly bonkers) assumptions about the middle east, while the continuing presence of the US was making things worse. So what does staying achieve? Well nothing. The situation got worse, it cost the US more money – no strategic objective achieved, and everyone knew they’d have to pull out eventually if only through bankruptcy. It also demonstrated that the US military was less good than previously thought (not a great signal) and that the US is easily fooled (not a great signal).

Continuing to do something that is dumb, at great personal cost, that makes your strategic position worse – that basically signals you’re an idiot. And quite frankly, if it was some kind of bizarre trick; any country that thinks its worth accelerating their decline to fool countries into thinking its stupider than it is. Well it probably is that stupid.

32

michael e sullivan 11.18.11 at 8:44 pm

TimW @28, my understanding of the relevant game theory is that “costly” here means that the cost is more than the generic value of the credibility — so in order for these actions to be rational, there either needs to be additional reason to undertake the action, or there needs to be a specific probabalistic strategy that works out positively in the average long run, even if sometimes specific short run actions don’t.

To understand the second case, consider poker and bluffing. You don’t bluff because you expect to do well by bluffing — you bluff because the combination of occasional big reward, plus the later advantages you get when you are called down and exposed (your winning hands are more likely to be called or raised) all adds up to a slightly better result than folding.

But even there, bluffing is obviously not “following through to establish credibility”. in fact, in a winning poker strategy, many of your bluffs are not called, because you have established credibility that most of your bets/raises represent value. And even if I get my bluff called a few times and lose, it is a lousy poker opponent that would assume that means I am *always* bluffing.

Contra Watson@6, when it comes to overwhelming force and deposing governments: a single follow through establishes a lot of credibility. Not many people are willing to play russian roulette. And similarly, it takes a certain kind of psycho ruler to believe that there is no danger in pissing off the US, even had we pulled out of Afghanistan quickly and never invaded Iraq.

There are two ways to establish credibility of military force. One involves making lots of threats, and then making sure you back some/most of them up when you have to. The other involves rarely making explicit threats that you don’t have very good reason to back up, whether it helps your credibility or not.

Some of us would suggest that this latter course is much wiser. Implicit unstated threats carry nearly as much power as explicit ones, hence TR’s famous line: “Speak softly and carry a big stick.”

33

michael e sullivan 11.18.11 at 9:03 pm

Yes, cian@30 has it exactly. In order for it to be rational to “establish credibility”, your actions must also achieve something besides this credibility. There has to be *some* intrinsic positive value to what you are doing, or the credibility argument can’t possibly work.

And it should be obvious why it can’t work. What if it is possible for anyone to establish some valuable credibility in a way that costs less than the credibility is worth? The only equilibrium involves everyone establishing that credibility. And the fact that this is the only equilibrium will mean that nobody actually has to do anything to achieve it — said credibility will be assumed by all actors.

34

Watson Ladd 11.18.11 at 9:16 pm

Let’s concretize: say I am in the desert and you drive up and I say “bring me to the next town and I’ll pay you $100. But I don’t have it on me.” When I am in the town I could just walk away and stiff you. But if you know that about me, you won’t help me, and I will die. Even if honesty might be costly, it is the best policy because it enables you to trade things you will do. Our social expectations of honesty and enforcement of contracts are ways to make this possible.

The ECB seems to be in an interesting position compared to the US Fed. While the US Fed is fighting a government unwilling to expand spending, the ECB is relying on stimulus spending to happen. But the politics of that spending are impossible: Germany would need to bail out Greece and Italy. So the result is like in the US a paralyzed central bank, but for fundamentally different reasons.

35

Henri Vieuxtemps 11.18.11 at 9:25 pm

I’m definitely for credibility, provided that those who don’t care about credibility are not forced to do anything. Kissinger, if he is for credibility, should either immediately get a tin hat and hand grenade and crawl into a Vietcong tunnel, or never utter the word ‘credibility’. The ECB expert should immediately go work as a taxi driver in Athens for 5 years, and live off that income.

36

cian 11.18.11 at 9:46 pm

I don’t think that one really works either Watson. Someone who would be willing to leave you in the desert to die is probably going to demand the money. Someone who would trust you, probably wouldn’t expect $100 to save your life. Most people will help in a situation like that, while recipricocity in human relations mean that most people will try and do their damndest to pay the debt off afterwards. Game theory works for organisations (up to a point) and psychotics – but normal human beings don’t operate in the ways that the rules tend to assume.

Basically people pay social debts because that’s the way we’re wired.

37

cian 11.18.11 at 9:50 pm

Italy might be a more fun game to consider. Italy is okay, so long as bond yields remain low. However fears of default cause the yield to rise, making default a possibility.

The only thing that Italy can do is austerity – but austerity will cause the GDP to go down, making default more likely – and making the yield curve rise.

So game theory fans, how do you get out of that one. I’m thinking invading Corsica might be the way to go here.

38

mpowell 11.18.11 at 10:30 pm

@25:

For an example of a severe recession as a cost of shifting inflation expectations downward, I think the 1979-1982 recession in the US would qualify.

I’m thinking that this is a pretty relevant example, but doesn’t it really undermine Draghi’s claim? The recession most of Europe is experiencing right now is quite a bit worse and the recovery has been extraordinarily anemic. The Volcker recession in the time frame you refer had a sharp V-shaped recovery. I’d trade that recession for this one any day.

39

hopkin 11.18.11 at 11:04 pm

I think Italy is better off simply pretending to deal with its deficit while waiting for the Germans/ECB to decide whether they want to bail them (and themselves) out. As holders of the third biggest debt in the world, they’ve got a gun pointed to everyone else’s head. They can also credibly commit to chaotic politics, slow implementation of reforms and a certain victory for populism in the next election.

A kind of Latin mad-dog?

40

Watson Ladd 11.18.11 at 11:20 pm

cian, Darwinistic determinism then forces you to look further back and ask why such rules of solidarity evolved. The point I was making is that promises that you might regret later are useful tools, and you just seem to say “yes, but that isn’t why people make them.” No, it is because they are useful that they are made.

41

Manoel Galdino 11.18.11 at 11:41 pm

number 11.

I’m a Brazilian and I have a B.A in economics (but my PhD is in political Science). I’d say that, if any, Brazil is a case in point… that a central Bank doesn’t need to be consistent to can bring inflation back to the target. We have inflation target since 1999, and about half of the time we have more inflation than the target (including the confidence interval). And yet, our Central Bank is supposed to be credible…

best regards,

Manoel

42

Watson Ladd 11.19.11 at 12:01 am

Sure, but that’s because long run they hit the target. So the ECB has more freedom then is publicly discussed, but not much.

43

sg 11.19.11 at 4:48 am

Watson’s snitch example is surely a bad one. The reason snitches are bad is that the information causes the police to come down on you like a ton of bricks. So killing the snitch and getting police attention is hardly a big increase in short term cost, and may actually reduce the short-term cost if the snitch hasn’t yet provided all the information, or the snitch’s cooperation is important to the police for prosecution reasons. Plus it carries the implicit threat to other future snitches. So it’s not clear that the trade-off Watson provides (threat to other snitches vs. police trouble) is correctly formulated.

I have a question for the economists here about bonds. Please answer! Is it the case that the current bond yield rate (e.g. 7%) applies to Italy’s current debt? I.e. did Italy issue all its current debt instruments with variable exchange rates that the market chooses? I don’t believe they – or anyone – is that stupid. Rather, is it not the case that the current bond yield rate is only on debt issued now, so in theory won’t have to be paid for 10 years? And is it not also the case that this rate is only being offered because people in the market are selling bonds out of fear of default, so the price of bonds lowers and then when Italy redeems those bonds the apparent interest rate is 7%?

44

Xerographica 11.19.11 at 9:54 am

Each and every taxpayer should be allowed to consider the opportunity costs of war.

45

David 11.19.11 at 10:20 am

T-bills pay coupons every six months, not just at end-of-term.

46

cian 11.19.11 at 10:47 am

sg: You pay interest rates throughout the term of the bond. Not sure if its six months, or three months, for Italian bonds. Its only the principle that you redeem at the end.

If you currently buy an Italian bond, you’ll pay a lot less than the face value. Say for argument its a 100 Euro bond paying 5% interest, but you only pay 80 Euros for it on the market. Then you’re effective return on it will be higher (5% of 100 Euros will be 6.25% on 80 Euros) – plus obviously you’ll get 100 Euros when its redeemed. So the price of existing debt doesn’t change the rates that Italy is paying on that debt. It still has the 100 Euros.

However, obviously if you’re issuing new debt, both for new spending, and to cover bonds that need to be redeemed – then they need to priced competitively against the stock of existing debt. So new debt will have a much higher interest rate, otherwise no one will buy it (there’s a little more to it than that – but hopefully that communicates the gist).

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cian 11.19.11 at 10:54 am

Darwinistic determinism then forces you to look further back and ask why such rules of solidarity evolved. The point I was making is that promises that you might regret later are useful tools, and you just seem to say “yes, but that isn’t why people make them.” No, it is because they are useful that they are made.

I honestly cannot follow the logic of this. My point was you wouldn’t need to make the promise in the first place. People will almost always help people are in that level of trouble. The rules of repricocity mean that you’ll feel a sense of obligation to the person who helped you (unless you’re a psycho – in which case all bets are off). People don’t work in the way that economists, game theorists (or at least the vast majority) or public choice theory assume.

Your point about promises makes no sense to me. And Darwinistic Determinism is for the most part a series of Just So stories created by a bunch of pseudo-scientists.

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sg 11.19.11 at 12:26 pm

Thank you cian and David. So in essence, the “high interest rates” we’re seeing now don’t affect the vast majority of the debt that Italy already holds (which is about 140% of its GDP). This it is still paying interest on at whatever rate it offered the bonds at originally. And the new debt is only being offered at high rates because of the apparent interest due to market forces, so as soon as the panic subsides interest rates will go back down. It’s only debt that Italy issues during the crisis itself that is at 7% interest, right?

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Henri Vieuxtemps 11.19.11 at 12:34 pm

There is no ‘why’ in determinism, only ‘how’. It is what it is. Why? Because that’s the only possibility. With a ‘why’, you’re already in the ‘intelligent design’ territory.

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Zamfir 11.19.11 at 1:08 pm

@sg, yes, but keep in mind that they have to roll over their old debt as well. Every bond that comes due this year has to be replaced by a new bond, at the new rates.

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Tomas 11.19.11 at 1:12 pm

@sg,

Well, if in “debt issued during the crisis” you are including debt that has reached maturity and has to be refinanced then yes. As I understand it the average maturity on Italian debt is around 7 years, so a ballpark figure is that they have to issue 1/7th of outstanding debt plus new debt from deficits at these rates.

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cian 11.19.11 at 1:22 pm

Its worth remembering that most Italian debt is held by Italians, and there is a tax base. There shouldn’t be a crisis based upon fundamentals – it’s being driven by a market panic. However the ECB’s solution probably will screw the fundamentals.

Its like everyone feared that the US was going to invade Iraq based upon a twitter rumour – and the US response to this was well if they fear it we’d better do it, otherwise what about our credibility?

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Watson Ladd 11.19.11 at 1:40 pm

Henri, cian: Human nature is not an explanation of anything. You have to ask why humans act the way they do, and just saying they do isn’t an explanation. Likewise when it comes to Darwinistic explanations, those have a form of causation: this feature dominates because it has a benefit. What is the benefit of cooperation and promises?

Henri, physical law has explanatory power which you entirely rule out with that comment. Why is the sky blue? Rayleigh scattering.

cian, I’m not sure I get the thrust of that last comment. The ECB is one of the fundamentals that Italy has to deal with. If the ECB was to monetize the Italian debt I don’t see how that helps: investors would demand higher interest rates on all Euro debt because of inflation risk. Italy has a primary surplus, so it would be reasonable for Germany and France to bail it out and extend the maturities of the bonds. But that doesn’t seem to be in the cards, and most investors seem to disagree about Italy’s ability to pay back its debt.

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sg 11.19.11 at 2:12 pm

Zamfir and Tomas, this means that in 7 years time (or is it 10?) they’ll have to pay out at 7% interest on the one months’ worth of debt they issued during the “crisis.” No problem if their economy grows by more than 7% in 7 years, right? But one months’ debt is nothing – they’re up to 160 % of GDP, accrued over 10 years (2 years ago Italian debt was something like 120% of GDP).

So for any nation the issue appears to be not so much the interest rate on debt at any particular point of time but the rate at which debt increases. If your debt goes from being e.g. 10% of GDP to 90% of GDP in a month, then 10 years from now you’ll be seeing debts worth 80% of your (10 year prior) GDP maturing and may have to cash them out if people are unwilling to roll them over. But for a country like Japan at 220% of GDP, any increase in debt in any reasonable window will be tiny, so high interest rates in any moment of time will be irrelevant.

So why, actually, are the bond markets worried about Italy? A year ago its debt was at broadly similar levels. It’s certainly much lower than Japan, but Japanese bonds are at 0.5% interest. Is this issue built entirely on imagination?

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Chris Bertram 11.19.11 at 2:34 pm

And here’s Wolfgang Schäuble, as quoted in the New York Times

http://www.nytimes.com/2011/11/19/world/europe/for-wolfgang-schauble-seeing-opportunity-in-europes-crisis.html?pagewanted=2

“There is a limited transition period where we have to manage the nervousness on the markets,” Mr. Schäuble said. “If it is clear that by the end of 2012 or the middle of 2013 that we have all the ingredients for new, strengthened and deepened political structures together, I think that will work.”

He sees the turmoil as not an obstacle but a necessity. “We can only achieve a political union if we have a crisis,” Mr. Schäuble said.

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Andrew F. 11.19.11 at 2:51 pm

How do those criticisms of a particular credibility argument in the IR context translate to criticisms of credibility arguments in the inflation expectations and monetary policy context? Do they hold up when we add the features of the current eurozone political and monetary structure, and the current crisis, to the analysis?

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conjectures 11.19.11 at 3:00 pm

There’s also another strategic cost to a given war, depleted ability to engage in other wars. Increased credibility of intentions (even if we should care about it) is balanced against decreased credibility of means. We wouldn’t be surprised by a boxer waiting while their opponent became exhausted from flailing around in the air.

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cian 11.19.11 at 5:48 pm

So why, actually, are the bond markets worried about Italy? A year ago its debt was at broadly similar levels. It’s certainly much lower than Japan, but Japanese bonds are at 0.5% interest. Is this issue built entirely on imagination?

No, Japan’s in a totally different situation. Firstly they control the currency, so its impossible for them to default, unless they wanted to (which sane governments don’t). And much of Japan’s debt is essentially fictitious – it’s basically owned by the Bank of Japan. Also Japan’s an extremely safe currency – the currency tends to appreciate against over currencies, and there’s virtually no inflation.

Italy has effectively borrowed in a foreign currency, so they can default. But much of what’s happened is self-perpetuating. Basically various funds had to sell Italian bonds, which created a mini-run, which meant over institutions had to sell them – which meant the yield went up, which meant suddenly Italy couldn’t afford to service new debt, which means that they’re at risk of default, which in turn drives yields up… And then if you get into a austerity binge…

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cian 11.19.11 at 6:14 pm

If the ECB was to monetize the Italian debt I don’t see how that helps: investors would demand higher interest rates on all Euro debt because of inflation risk.

You mean as they are on US and Japanese treasuries? There is no inflation risk. One of the major contributors to slower EU growth over the past ten years has been the extremely tight money supply.

Incidentally, it’s not like the ECB would have to buy all the debt, just the debt being sold by panicked external banks/funds.

But that doesn’t seem to be in the cards, and most investors seem to disagree about Italy’s ability to pay back its debt.

At 7+% Italy probably will struggle to pay its debts. At 3-4% it will be fine. The problems were caused by higher interest rates, which were fed by a market panic – that market panic resulted in higher interest rates. Well you get the picture. Slashing government spending in Italy will simply decrease GDP, which isn’t going to help anyone.

I’d agree that the Euro as a project is doomed if it doesn’t start redistributing money. Germany’s belief that it can keep exporting and sit on all the money is mystifying. But Italy is only in trouble because of a market overreaction/panic.

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cian 11.19.11 at 6:31 pm

Watson this from Paul Krugman makes the point better than I could (from just before the crisis on Italian bonds really hit):
I would consider the margin question part of a broader issue, which I think of as Shleifer-Vishny, after their classic paper on the limits of arbitrage (pdf). Their point was that a fall in the price of some asset, even if it should in principle present a buying opportunity if the fundamentals haven’t changed, may actually be self-reinforcing instead if there is a limited class of leveraged investors who buy that asset. Why? Because the capital losses those investors suffer may force them to pull back instead of piling in.

I can see this happening here. Most Italian debt may be held by stolid domestic players, but at the margin are financial institutions that are quite possibly going to be forced to cut their holdings if Italian interest rates rise, because this will reduce the value of the bonds they already hold. So things could quite possibly go blooey in the very near future.

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Watson Ladd 11.19.11 at 6:45 pm

It seems we have two different views of the situation. For cian the issue is that Italy faces low growth: if the ECB lets the money supply grow inflation will not increase because the economy will grow instead. (Velocity of Money equation). This will raise revenues in Italy enough to cover the debt payments, and drive down interest rates.

For me I don’t think that will be enough. Clearly very few people are running to get these cheap bonds: the risk of a default is real. As a result for Italy to continue government operations someone will have to make a loan on very unfavorable terms. If that’s the ECB and they don’t demand repayment that will massively expand the money supply in the Eurozone (which may be a good thing) but also raise questions about whether other countries will get the same treatment. Italy should be shifting to longer term debt in its auctions and cutting back on the debt issuances to avoid penalty rates right now, regardless of any possible deal on inflation. Clearly Italy cannot expand the economy of Italy: it has no maneuvering room. But Germany could.

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cian 11.19.11 at 8:06 pm

Watson,
I’m not sure how to respond to your very confused post. I think you might need to read up on bond markets, and what central banks do.

We are witnessing a market crash, which was triggered by funds having to meet margin calls. Then other funds had to sell bonds because they didn’t meet their risk requirements. Which triggered further falls, and further falls. And then this caused people to panic (quite reasonably) that the Euro might be splitting up due to German/ECB responses to the crisis. And now nobody wants to buy Italian debt (and increasingly French and Dutch debt) util the situation is resolved.

It is a MARKET CRISIS, like Lehman’s was. Italy is solvent. However it can’t pay rates of 7%+. That would make it insolvent pretty fast. Normally the Italian central bank would step in – but they cannot, because Italy does not control its currency.

For cian the issue is that Italy faces low growth: if the ECB lets the money supply grow inflation will not increase because the economy will grow instead.

I have no idea what this is supposed to mean. Italy will have low, or negative growth, if forced into serious austerity cuts. Which will make their debt grow to GDP. This is not only pretty basic economics, but we’ve witnessed multiple examples of it at this point. It scarcely needs proving.

Inflation won’t grow, because Europe’s not facing inflationary pressures; quite the opposite. Again, have you been asleep since the last few years?

As a result for Italy to continue government operations someone will have to make a loan on very unfavorable terms. If that’s the ECB and they don’t demand repayment that will massively expand the money supply in the Eurozone (which may be a good thing) but also raise questions about whether other countries will get the same treatment.

Um no, the ECB would just buy existing bonds from the people selling them and put a floor on bond prices. Once it was clear there was a floor on the things, and that Italy was not going to be let collapse (and that the Euro actually has a central bank), the bond market would normalise. At some point the ECB would sell them back. If Italy still had the lira, their central bank would be doing exactly that at the moment. Its what Central Banks do Watson.

This is not an economic problem, Watson, its a financial one.

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Manoel Galdino 11.19.11 at 8:16 pm

Brazil now pays something about 11% of interest. With inflation at 5%, it’s about 6% real interest rate…

I don’t think the market makes any sense.

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Watson Ladd 11.19.11 at 8:27 pm

cian, central banks control the money supply. They are not piggy banks to be raided at will by the central government. You are asserting that Lehman was solvent, which I don’t think anyone believed at the time. Italy can freely borrow on longer duration to avoid the temporary market crisis here: the central bank doesn’t need to be involved. The ECB has already been doing sterilized purchases of Italian bonds, but is running low on money to do them, with no sign of this fixing the problem. Then again they might need to commit to doing this no matter how much it will cost.

Secondly the Eurozone is an integrated economy. Goods and services and people travel freely, so I don’t see how Italy can change its economic performance that much. Stimulus in the Eurozone will take coordination. I think Italy is the latest causality of the global deleveraging: once people don’t want to loan money, nothing will save you if you need to borrow. You seem to be suggesting that the ECB be that borrower, which essentially means that Europe has a new commitment to make loans at non-penalty rates to countries in trouble, one forced by the situation at hand with no debate or democratic disagreement.

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cian 11.19.11 at 9:23 pm

Watson you seem deeply confused about my point, which may be my fault.

There are two scenarios for Europe:
1) Do nothing (and steralisation is doing nothing – because its just kicking the can down the road. Early next year the money runs out, then what. And investors have factored that in – that’s why they’re not buying).

Italy defaults at some point next year. Which means game over for the euro (it also means game over for US banks, German banks, French banks and Dutch banks). It probably means at least a rerun of 2007 and I suspect given the political realities a rerun of the 1930s. And probably the breakup of the Euro.

2) The ECB prints money to buy Italian bonds and lowers rates to a point, and makes it clear it will continue to do so if necessary. That is, it is impossible for Italy to default.

Everything else is politics, including what happens after scenario (2). But Situation (1), which is what the ECB is sleep walking towards is doomsday.

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Anders 11.19.11 at 10:00 pm

@Watson – central banks control the narrow money supply, but huge changes to narrow money don’t appear to have wrought much in terms of changes in broad money.

Now, central banks can via QE bring about a swift rise in the level of broad money by buying bonds from non-banks as opposed to banks. If you don’t believe money is endogenous (ie that non-banks can easily shed ‘excess’ deposits by buying securities from banks), you will conclude that inflation will ensue, other things equal. But right now in Europe, other things aren’t equal. Banks are set to shrink their balance sheets hugely by next June – bringing about an almighty contraction in broad money. There is every reason to believe the ECB could buy well over EUR 1 tr in sovereign periphery bonds before any expansion in broad money would be seen.

Specifically on Italy, what the ECB would (should!) do is announce that it would defend explicit yield ceilings for various points on the Italian yield curve by unlimited, unsterilised purchases of BTPs. If this intention appeared credible, yields would snap down to the target via arbitrage, potentially without material QE required (see the Swiss record on defending their CHF/EUR ceiling).

There is every reason to believe that Italy will be ok with a little help on bond yields. The key metric is the net international investment position. Italy’s NIIP is negative but only c. 10% of GDP or so, like the UK. Greece’s problems can be expressed with the fact that its NIIP is maybe minus 150%. This would ordinarily be brought back into equilibrium by a devaluation: the UK move from minus 25% in 2006-7 to 6% in 2009 thanks partly to sterling falling. But as Greece can’t do this, the only alternative is default.

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Bloix 11.19.11 at 10:04 pm

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Watson Ladd 11.19.11 at 11:01 pm

Cian and Anders, good points. So I think the case has been made that ECB action can remove the threat of an Italian default. So why aren’t the supposed German paymasters okay with that?

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Bloix 11.20.11 at 2:39 am

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Watson 11.20.11 at 8:58 am

Watson – good question! I can only assume it’s utterly institutionalised dogma – reinforced by the door to the bundesbank having a banknote with umpteen zeroes on it, to reinforce the obsession with inflation as a logically prior concern which trumps all others.

The idea is that the ECB would literally feel proud on one level if they presided over the demise of the Euro, because they had maintained their principles.

Or – this is a concerted effort with the politicians to try and assume ever greater fiscal control over Europe…

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Peter T 11.20.11 at 11:08 am

Like most game theory thought experiments, this does not tell us much about the real world. Strategy is creative – if your opponent signals they will go berserk if you cross some threshold, you set to thinking about ways to reach your goals without actually crossing that particular line as stated. Also, there are always more than two players – a reputation for going berserk may intimidate your prospective enemies, but it does not reassure friends, allies and neutrals. Not short-term pain for long run gain, but immediate (perhaps) gain for long-term loss.

In the case of the central banks, how long before default becomes respectable? Or central bank independence is questioned? Or countries start cooking the books on debt and inflation. Oh, sorry, that last one has already happened.

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cian 11.20.11 at 1:06 pm

Watson – I think the short answer is that nobody really knows. There are plenty of plausible explanations, but no way of choosing. Possibilities include:

1) Protecting French, German and Dutch banks. yes this is stupid, but I think we’ve established that they are stupid at this point.
2) German obsession with very low inflation – possibly because its engrained into their culture that thrift is good, and that goes with an aversion to inflation (the hyper-inflation thing seems a bit hokey to me. that was nearly 100 years ago).#
3) A desire to ‘punish’ lazy countries on the periphery
4) General anger with the Greeks for cooking the books, which has just kind of become a moral principle.
5) Really, really, bad economic theory/ideology trumping reason, common sense, reality and facts.

In essence the lending that went on was redistribution by the Germans. They don’t spend the money they receive, so their banks recycle it as debt. Given there wasn’t much they could do with it in Germany, maybe they should just write it off. Much as the Chinese effectively write off US debt.

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Tim Wilkinson 11.21.11 at 11:36 am

May I just reiterate, in case there is any doubt, criticism of the argument quoted in the OP. (I leave aside discussion of the folk theorem or the apparent supposition that satisfying the minimax condition is a trivial constraint on the choice of strategy – criticism of the ECB is not in reality dependent on a devastating critique of strategic games.)

The OP:

“if we take strategic considerations into account, there is a game-theoretic rationale for practically anything”

Therefore (if one accepts this):

OP1: game theory is useless for strategic purposes.

if a given real-world course of action appears to have nothing going for it other than a game-theoretic or strategic justification, it’s almost certainly a bad idea.

Game theory per se having dropped out of the reckoning by now, per OP1, we should probably note that this entails:

a strategic justification is almost certainly inadequate to motivate any course of action.

Thus it is with that bastard child of deterrence, “credibility”.

As would have to be the case with deterrence itself. So deterrence is inadequate as a reason to carry out costly punishments. And if you can get away with it vis-a-vis third parties, refusing to pay your supplier for their first shipment is presumably rational too. This is not looking like a good approach – a bit on the overgeneralised side, very much like the application of folk theorems.

So to the next step:

to do the logical thing would send the signal to our enemies that we will give up if fought to a pointless bloody standstill. Therefore, for strategic reasons, we must redouble our efforts, in order to send the signal to our enemies that we will fight implacably and mindlessly in any battle we happen to get into, forever, in order to dissuade them from attacking us in the first place.

Obviously this is where the main fallacy lurks like a foreign object in a festive beverage. It’s not the confusion of ‘not sending signal a’ with ‘sending signal not-a’. It’s not even the idea that appearing irrational involves being irrational (that one is more dominant in the next passage).

It’s the apparent inability to distinguish between short-term, narrow or prima facie costliness and all-things-considered costliness. Very basic, very simple – analogous to the idea that there is no real altruism because if you choose to do it you must have a motive and if you have a motive you are acting self-interestedly. Instead it’s the idea that it can’t be rational to make a truly strategic move because if it’s rational it can’t be costly, and unless it’s costly it isn’t really strategic.

But in fact taking out the entertaining stuff about pointlessness and mindlessness, the idea might be something like: we do not want to send the ‘signal’ that a non-pyrrhic victory can be had against us. If we cannot achieve our own war objectives, we must therefore at least frustrate those of the enemy.

(If the game of being a belligerent idiot with no sensible regard for one’s own welfare was worth the candle, in the sense of conferring benefits which outweighed the cost of gaining it, then everyone would want to get that reputation, whether they were genuinely an idiot or not. But if everyone wanted that reputation, then everyone would know that simply acting like an idiot didn’t mean that you were one, in which case it would be impossible to establish a reputation as an idiot in the first place.

An odd little tangent – we have the same tendentious misdescription of the relevant property: not being profitably resistible gets confused with being an idiot.

Then a weirdly irrelevant non-sequitur: if it were a good thing, everyone would want that reputation, which is of course not the case.

And meanwhile, nothing has been said to suggest that everyone does not in fact want that reputation – and under a sensible description, ‘everyone’ probably does.

Then another non sequitur: ‘if everyone wanted that reputation, everyone would know that simply acting like an idiot didn’t mean that you were one’, which is baffling, though it might be true in virtue of the material conditional’s truth table.

Somewhere closer to reality, the point of getting the reputation of acting like ‘an idiot’ is to generate expectations about how you will act (your ‘idiocy’ must appear quite systematic of course in a very particular way). So actually, acting like one does ‘mean’ that you are one for these purposes. Does acting in manner M guarantee that one will always act in manner M? No. Is it likely to make people expect that you will do so in future? Yep.)

a signal has to be a costly signal to be credible… People who use the word “signal” in this context (usually on the basis of a poorly understood or second-hand reading of Schelling) don’t always seem to realise that they are explicitly admitting that the costs…are greater than the benefits.

This is the same apparent failure to comprehend the distinction between short-term and overall costliness, as well as repeating the error of supposing that what is being done is sending a signal rather than avoiding sending one.

Similarly, michael e. sullivan:

What if it is possible for anyone to establish some valuable credibility in a way that costs less than the credibility is worth? [why then everyone would do it, there can never be a £5 note on the ground, etc.]

I’m not sure this – the idea of the ‘generic value’ of credibility – really makes sense, or at least not in a way which would make such a thing a matter of a ‘free lunch’ that flouts some conservation or parity law.

In order for it to be rational to “establish credibility”, your actions must also achieve something besides this credibility.

Not besides: beyond. There has to be some reason why this credibility is useful (its destruction is harmful). And that depends I suppose on what ‘flavour’ or level of generality is involved in what is to be expected from the other party.

There are two ways to establish credibility of military force. One involves making lots of threats, and then making sure you back some/most of them up when you have to. The other involves rarely making explicit threats that you don’t have very good reason to back up, whether it helps your credibility or not.

Seems pretty arbitrary selection. But the key issue is surely that the whole point of threats is the other party must believe you won’t carry them out if they comply with your demands. So threatening to do something you want to do anyway is – on the kind of assumptions about people knowing each other’s minds that seem to be required by this whole line of discussion – pretty stupid.

The thing that governs how many and which threats you make should probably be how many and which things you want to coerce others into doing. If we’re talking about making sure you get a reputation for following through on your threats when defied, presumably you would want to ensure that of those threats made whose accompanying demands have not been met, you carry out a sufficient number that your intended audience will decide – at a sufficient rate – that it is better to conform to your demands. Or something.

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Ralph Hitchens 11.21.11 at 4:22 pm

I suspect the Vietnam strategy pursued by the Nixon administration owed as much to Nixon as Kissinger. The essence was “Vietnamization” and the eventual substitution of US bombs for US boots on the ground. And the response to the 1972 Easter Offensive was the proof of concept. By and large, it worked, until all was undone by Watergate.

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Peter T 11.22.11 at 6:40 am

Ralph

But it did’nt “work”, in the sense of signalling US willingness to maintain an independent South Vietnam. The 1972 offensive did not go through to Saigon, but it left South Vietnam in a hopeless position – the central highlands occupied, North Vietnamese access through Laos and Cambodia to practically all of South Vietnam, and a clear US inability to challenge this. So Kissinger’s “credibility” was credibility with whom? The South knew it was gone, the North, Chinese, Russians etc knew the South was gone. The US military knew they had lost. What it was is what so often arguments for maintaining credibility so often are – a cover for building a “stab-in-the back” legend so you can evade responsibility and blame.

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