Lacking energy

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Free Stuff

For those following along closely; this Balaji riff will resonate. 

A lot of people are asking why the DeepSeek model was just given away and open sourced. Balaji goes to the heart of the answer. It went much further than just the model. Earlier this month they had what they called ‘open source week’ and gave away some brilliant stuff about model use, training, inference and quantization. All of which was elegantly summarised here. In any other world this would be highly protected IP, but not this time around.

We know too that under the Biden admin, it was made quite clear to American tech companies that “AI will be controlled by two or three companies and we will decide who”. We know this because venture capitalist Marc Andressen was in the meeting and told everyone. 

That plan has not worked though. The AI Chip ban has not worked either because the Chinese got around it with brainpower. I pay $200/month for the fancy OpenAI subscription. It's very good. Its research tool is also very good but the Chinese model is free. In most cases it is as good, because it is open source it is also likely to get better more quickly. Could I ditch OpenAI and not notice? Probably yes. DeepSeek’s main problem now is that everybody in China uses it, so it's slow at times and crashes a lot. It even has on/off peak pricing for its API. 

The whole point here is the cost of software is going to zero. Not just in the case of AI but in the case of almost anything because building it yourself will be trivial. The cost of knowledge is already zero because everything known is now at your fingertips. 

In interviews with Australian University students this week one of our questions is about AI and which models they have used etc. They all remind us that DeepSeek is “banned at university” That is only partially true of course, DeepSeek on Chinese servers is banned, but you can still run the thing yourself if you have enough fancy GPUs. 

It does bear thinking about though. The one completely free and deeply knowledgeable model the world has is banned “because China”. It’s a little bit Church v printing press in its thinking. Banned because it might share the wrong thoughts, or steal your thoughts. The Church banned these books for the same reason, many of which are rather good. In fact, one or more works by nearly every modern Western philosopher at the time were censored in the Index.

The Western press has changed its tune a bit too since the ‘DeepSeek’ moment. How many of you know for example that V3 of DeepSeek was released on Tuesday this week? There is much less fanfare about the Qwen models too (which are excellent) and the fact that the Chinese lead in video generation models. 

Wanx 2.1 though? It would be fair to say that they could use a little help on their naming conventions.

IMF

An exciting week in global statistics. The IMF released a draft of the seventh edition of the “Balance of Payments Manual”. It’s not an annual dance either, the first one came out in 1948 and we haven’t had a new one since 2009. 

At 1,100 pages long, it entirely explains why the IMF has 3,000 staff. On page 73 for example, it covers how you should record package tours in your economic stats. Specifically you should unbundle them, the flight goes with the flights, the hotel with the hotels. That kind of thing. 

For the first time the Manual has included bitcoin and cryptocurrency. It made some interesting distinctions. 

The fact the IMF is calling out the fungibility of bitcoin is good. It is a key feature of bitcoin (and a critical feature of money). All bitcoins are equal. 

Further they point out that some assets have a corresponding liability. Like a stablecoin. Stablecoins are financial instruments. Bitcoin is then further defined as an asset ‘without counterpart liability’.

It is dealt with very early in the document in the “major changes introduced” section. 

I would make two points here. The first is that the casual inclusion of the words “without counterpart liability” is significant. There are almost no assets in the world with that feature (physical gold is one). People say “cash” but cash is a liability of a retail bank or a central bank. The fact that they can no longer pay you back in anything but promises is for another day. Bonds, equities etc. somewhere they are the liability of another person or entity. 

Second. The IMF guide is about nation state accounting. If they include Bitcoin in their guide it’s because a nation state has asked “hey guys how do we account for our bitcoin?”. So I know it’s hidden away in a document nobody reads and nobody knows exists but its inclusion is not trivial at all. 

India

India’s relationship with cryptocurrency has been rather fraught. There is a legacy of currency controls and investment restrictions that has meant regulation is difficult. 

In 2018 the Reserve Bank of India effectively introduced an outright ban by preventing local banks from dealing with cryptocurrency operators. Eventually that ban was overturned by the Supreme Court and more recently the view of the regulator has been favourable. US giant Coinbase announced this week that they have received a license to operate in India and they plan to start later in the year.

12% of global developers, from 3% five years earlier. Amazing.

India is also famous for its “India Stack”. Essentially a national system for ID and payments that many people object to because its a digital gulag. Maybe but they have 1.3 billion people speaking 120 different languages. India Stack is over a decade old, was a massive effort, is highly successful and probably is one of the reasons for the countries growth rate. 

Whichever way you look at it, congratulations to CoinBase and welcome aboard India.  

17

I have always liked Charlie Bilello’s blog, because all he does is charts. This week it was US home prices. 

One thing struck me. From 1948 - 1975, house prices in real terms only had one good year and 17 shockers.

I’ve yet to meet anyone who believes this might happen in Australia, except it has. Melbourne house prices fell 51% in real terms in the 1890s alone. Real prices across the country were then flat for 60 years until 1950. Prices went down across the board in the 80s too. 

There are lots of factors of course but our continual decline in income per head isn’t helping. Australian’s love housing because it’s “safe” but it really isn’t. A real yield of 0.5% per annum over a 100 year period actually sounds about right for something that basically keeps the rain off your head. That real yield of course does not account for your maintenance cost, which will be significant. 

If there were an asset that did not lose value with time and could not be deflated by the government and that asset did not come with maintenance and headache overhead. Well, I would be interested. 

Euro-Trash

An intensely relevant report for a continent falling behind on almost every level. Where will the energy come from?

Some interesting points are made. Notably that a Chat GPT query uses 300 times the energy a google search does. It’s somewhat arbitrary in terms of how the energy is allocated but you can safely say it is orders of magnitude more. Most European AI queries use American energy though because that’s where the GPUs. 

America has the same issue, its demand for energy is sky rocketing. Not just AI but their onshoring plans for manufacturing will require huge amounts of power. It is entirely possible that Europe just gets cut off from American AI products because power demand will be allocated to ‘America first.

Europe’s story though is a diabolical one. The overall power consumption of the economy is down some 10% since 2005. The nearer term decline was covered in some detail by the iea here. Essentially manufacturing is collapsing in Europe after the German nuclear debacle. Energy has become so expensive that people are afraid to use it. It directly mirrors the economic decline. Incredibly, Europe's targets for consumption are even lower for 2030, another 15% decline please. 

As we know there is no such thing as a low energy rich country. Unless energy is abundant, nobody is going to set up a manufacturing facility on one one hand, or a super modern data centre on the other. Both sides of the economy, the traditional and the digital will avoid Europe. 

The proof of the pudding is simply the price. France, which in fairness has a lot of nuclear energy, sacked the head of EDF this week (their main energy producer) because prices are too high. He’s just a scalp though, because French industrialists are complaining very loudly that they cannot compete. They are right. 

Meanwhile, back in the report from the EU there is good news! Apparently AI can help Europe’s energy transition because it's really good at making windfarms more efficient. 

“ One example is the AI-supported efficiency gains in the energy sector. AI has accelerated the modelling for new wind power sites by factor of up to 4,000.”

It goes on to say:

“The European Investment Bank has identified an AI investment gap of around 5-10 billion euro per year. Around 40% of small and medium-sized companies cite a lack of investor willingness to finance green investment as a very significant obstacle. Meanwhile, young European firms receive only a quarter of the scale-up finance enjoyed by US firms.”

So people, at least with their own money, know that EU policy is crazy. They know it's expensive, they know it cannot compete. This paper that claims AI is coming to save Europe with its brilliant ideas on windfarms is just nuts. It doesn’t matter how quickly you model a wind farm if private investors reject the investment proposal. There will be massive net transfers of wealth out of the EU as they are forced to use artificial intelligence hosted elsewhere. 

Even though we are here to trash Europe, we can’t pretend Australian policy is different. In this week's budget we ignored our 1,200 years worth of coal (which we happily export). We ignored 20% of the global gas reserves that we just seem to sit on and look at. We also ignored the 30% of the world’s uranium which we also just sit on and look at. The budget gave billions of dollars to “green energy tech manufacturing”. One thing is certain, that will just be a taxpayer rip-off. 

Europe has no chance because they have nothing to work with. Australia has everything and just does nothing. The richest country in the world in 10 years but nah mate, green steel and a $5 solar rebate. 

Further information

Our February 2025 report to investors can be found here.