Replaying 1929?
Articles Published: July 1, 2001
| Replaying 1929? Articles Published: July 1, 2001 |
DOUBLE ISSUE Ure: Electric Economics Mazurok: A Rate Comment
"Electric Economics": A New Paradigm for Capitalism
This week's report is long, so get yourself something to drink and set aside a few minutes of quiet time to go through this. Also, before launching into this week's discussion and my presentation of a rather elaborate rethinking of the whole field of economics, there are three things I need to confess right up front that have driven me to present this week's special "double issue" for your consideration and/or enjoyment.
First, is that I spend a lot of time in a 70-mile per hour sensory deprivation chamber that looks suspiciously like my old 944 on a 46-mile, twice daily commute from South San Francisco down to Fremont in the South Bay. This forces me to spend a fair amount of time thinking about this, that, and the other thing, while staring at the bumper or brake lights of the car in front of me. During this daily ordeal, I write down little notes to myself. This week, we'll be talking about some of those notes. Valid insights or road ravings? You be the judge.
The second thing that I need to confess is that I am absolutely enamored with something I wrote about two years ago that I call the "Substitution Method of Learning"™. If you're a long time reader, you may remember one of the papers I didn't save (darn it!) that dealt with how one can learn something by studying knowledge in one field, and then substituting words from the present field of study and thereby arrive and new insights and proposed conclusions - jumping over tons of testing. Using the "Substitution Method of Learning", for example, I daresay I could construct a roadmap of how computers and high technology will develop, by simply taking a leading work on how complex systems mutate, and then plugging in terms from the current area of study: this should predict how today's complex systems will operate. If you're interested, or skeptical, take a book like Darwin's "On the Origin of Species" and substitute terms to see what makes sense. Let me show you an example of what I mean.
In "Species" Darwin asks the question:
Secondly, is it possible that an animal having, for instance, the structure and habits of a bat, could have been formed by the modification of some animal with wholly different habits?
Now let me rewrite that for you using computer terminology. Let animal=program, bat=a word processor (Word 97), and habits=computer source code. If you're not a computer geek, source code is like the verbose paragraphs of computer instructions in a language like "C" that are run through another program (in this case called a "C"compiler) that distills - or makes - a small faster running equivalent of the source code that will run only on a particular microprocessor (a Pentium class for example) and only with a certain operating system (Windows 95, or later). Thus, if you have 100,000 lines of source code, that might distill (or compile to use the right phrase) into perhaps 8,000 lines of executable code for your P-3 box running Windows 98. This is what happens with most of the computer programs you buy. So knowing this, and substituting terms, Darwin now asks the question:
Secondly, is it possible that a program having, for instance, the structure and source code of a Word 97, could have been formed by the modification of some program with wholly different source code?
Sure! The most basic word processor simple does a "scan keyboard for input" and that's been around forever. What changes or evolves (to put it in Darwinian terms) is the addition of functionality from other species of programs. And the "sort" function within Word is just a habit (read: source code) imported from some other "animal" (read: other program). So we can almost "reverse engineer that within Word 97, there are database functions and spreadsheet functions that have been added in, probably from Excel, or the earlier source code for MultiPlan.
See how simple this is? The basic source of most word processors was probably something like EasyWrite which in turn begat Word beta 1 which begat Word released version 2, which begat Word 95 which begat Word 97, which begat Word 2000 which is largely incorporated into what this site is built on: FrontPage 2002.. It's an evolution and natural selection process, where natural selection is consumer expectations and price constraints.
The Substitution Method of Learning can give you a basic "Aha!" for the world of computers: The terms have obviously changed between Darwin and Gates. BUT: the form of knowledge has remained the same. Combine and pick the characteristics that work in a give environment.
When Darwin wrote about "habits" he was writing of repeated behaviors. When Bill Gates thinks about repeated behaviors of computers, what he's almost certainly thinking about is the continuum of computer source code, compiled code, operating system, processor constraints and I/O quirks and speed bumps, the aggregate of which gives repeatable behaviors, just like Darwin!. This gives us is a powerful insight into how Microsoft development really operates: They take source code from many different programs, and recombine it into "new and innovative products" to come up with a more complex bats...er...computer program that they can sell to us consumers as the latest and greatest.
It also teaches us that Microsoft is being very careful in their combination of products to keep certain key features out of one product or another. Why? Marketing. Demand for particular species. Lotus was way early with the program Symphony, but it was like a forerunner of Microsoft's Office Suite. It combined a word processor, a database, and a spreadsheet, all in a single package. But, it didn't catch on like Office, because the stand alone units were not powerful enough. The level of interdependence was too night and, absent the smooth Windows interface, the Lotus product was bound to fall short.
What Microsoft has done is pick the best of the gene pool in the interface world (borrowing richly from Apple and Xerox XPARC work) and combine it with a host of other "best of class" attributes. Every once in a while they go too far in the "borrowing" and integrating, but we'll leave that issue for the courts. The strategy is clearly very strong, yet it's an application of common sense, if you "get" the substitution of learning concept.
Look at the history of Microsoft: Hasn't Microsoft been doing exactly this since they got the source code for their first disk operating system (DOS) from an earlier operating system (CP/M 86) from Seattle Silicon? One thing most people don't realize about computer code is just how much of it lives in libraries and how much of it is pulled off a shelve, plugged into a compiler, and here comes a new product. Darwin would probably characterize such incrementally developed code and programs mutations of species.
Cloning, in the world of recombinant DNA research is the same kind of thing. Except, in this world, the "source code" is the DNA of an animal, and the mutation is some characteristic that is deliberately mixed in. The equivalent of compiling, is just letting the DNA live and go through a generation of life. If the DNA does something weird, like produce an animal that is sterile, it's not at all unlike a computer program that has an inbred "glitch" that causes it to lock up and cease operating at some point. Bad DNA splices are absolutely analogous to poorly written computer code that doesn't run correctly.
Just like it doesn't take a genius to build computer code, it doesn't take a genius to build recombined DNA. The genius in either case comes from making zero mistakes...so the code will run or the DNA will live and in both cases, there won't be a problem down stream. Frankenfoods on the one hand, or the Windows™ "blue screen of death" on the other.
On the Form of Knowledge
You need to have all these concepts working in your head in order to understand what we're really going to talk about this week, which is the notion that the minute we begin to measure things in the world of economics, we must develop a view that conforms to a certain "form" of knowledge.
I don't know how much time you've spent simply thinking about formulas in your head, and I haven't spent much time either, but it struck me as kind of odd this week that there is a basic "form" of equations that make up the basis of the modern world. I looked at three that came immediately to mind:
The basic Electricity formula: P=I*E (power in watts equals "I" (current in Amperes) times "E" (electromotive force in Volts)
The basis Physics formula: F=M*A (force equals mass times acceleration)
The basic Nuclear formula: E=M*C² (energy equals mass times the constant speed of light squared)
Here's the first thing that hit me: The really big stuff in our physical lives, physics, electricity, and atomic energy, all boil down to a simple form: x=y*z.
Now, maybe this is not a big "AHA!" yet, but bear with me. As I continued to stare at these formulas in my head (my eyes were focused on a truck in front of me) I noticed that each integrates time into the equation in one way or another. In the case of electricity, time is required to measure Amperes. In other words, Amperes is this many electrons moving past this point in so much time. In discussing this concept, I like to compare P=I*E with a garden hose. P is how much water you will get in a Pail where "I" (Amperes) is the VOLUME of water moving through the hose and "E" is the PRESSURE of the water.
In the two defining statements about physics, time is also of the essence. In conventional (Newtonian) physics, acceleration is described as a change in velocity over some period of time. In post-Newtonian physics C² is the constant speed of light squared, and we all know that it's about 186,000 miles per second. See that? A time reference!
Where Economists Went Wrong?
Unfortunately, when one gets into the field of economics, there is no commonly accepted "root" formula from which all the other stuff grows logically. Instead, the economics begins with trying to abstractly state "value" and begins with "constituent costs" and "supply/demand". What's missing in the most basic economic discussions is the time dimension. This undoubtedly explains why economics is such a muddled mess. Economists haven't demand grounding in the time dimension of here, now, and then. But as the rest of the world shows, reality has a time element at its core.
Think about it: If you don't nail down a time domain as the basis for development of all economic rules, you can note all possible relationships. You're bound to imply half-truths that don't work out gracefully. The ugly reality is that economics is time dependent. For example, the price/supply/demand picture all change over time. If you have a invent new product, and there is high demand for it, you can charge a high price - at least initially. However, over time, competition will invest in the field and will come out with a competing product. This competition pushes up supply, and unless there is additional demand, the price will come down until some equilibrium is established in the market.
Yeah, I know, all the stuff that gets Nobel Prizes in Economics is about ratios and proportions. Things like Tobin's Q (the ratio of financial assets versus physical production assets in an economy) are examples, to be sure. But I'm going to suggest in a few minutes, a different view. But first, I need to change how you look at the world a little bit.
What if - and this is a big IF - there is a fundamental form of knowledge where it comes to sorting out our world? What IF there is a simple equation right out there in plain site and a template we can steal from a parallel field that will do most of our discovery work for us when we dare to state it?
Although it sounds quirky, there's probably something about the way we humans perceive - and have built our world - so that everything consciously or otherwise conforms to an almost genetically imprinted x=y*z form. Further, either the term y or z has some element of time in it.
If you get in your car to go to work, whether you are conscious of it or not, your trip this form: x=y*z.
Except, you don't recognize it as just another x=y*z. Instead, under conditions of normal perception, you say d=t*r (where distance equals time multiplied by the rate of travel. Society doesn't teach us to perceive the basic formula. We run on habits and don't ask tough questions. We simply "know" that traveling 50 miles to work, at 50 miles an hour will take us an hour. But trust me, the whole world you live in is full of these x=y*z's where there's a time element.
Except in the world of economics, and I think we can fix that little oversight.
Quest for the Basic Formula
Armed with the "Substitution Method of Learning" and the notion that I'm looking for a general formula in the form of x=y*z and either y or z contains a time dimension, I decided to look for some set of formulas that would completely explain economics. I figured this should take more than a few minutes, because we have all kind of examples to chose from, including Newtonian Physics, and Electronics. Being lazy, and already knowing a bit about electronics, guess which one I chose?
P=E*I
This is the basic formula of electronics. Now, let's substitute economic terms and see where we go. Instead of having P means "power in Watts" let's not worry about naming "P" for a moment. Let's consider "E" and "I" first.
Going back to the analogy of "E" being like pressure in a hose, and "I" being the volume of water moved, let's look at "E" and call it "Exchange". Let's call "I" Industry which we can describe as production of goods over some period of time.
Plugging these terms into a simple economic example should make sense. Let's try "The number of dollars floating around an economic system, called Exchange, when multiplied by the amount of Industry (work done) in a day, should give us a sense of something. Let's call "P" prosperity.
Now we can test this notion, with a couple of simple thought exercises. If less work is done in a day, "P" prosperity should go down. Yes, that seems to hold up logically.
Suppose the number of money units (Exchange) goes down? Then the level of "prosperity" should also decline. Assuming we define prosperity in global terms that mean something akin to "retained earnings" of an economic system, the logical ought to hold up.
Hmmm...this is making sense so far.
Next, let's take on the second major rule of electricity, which is:
E=I*R
In electricity, the voltage "E" is equal to the current flowing (I) times the resistance to flow (R). Again, this makes logical sense. In order for equilibrium to exist, in other words a steady state in the economy, we need to define what "R" is. "R" needs to be some value that changes given different circumstances, and somehow relates to the amount of exchange (E).
Let's lump under "R" real goods, the reciprocal of resistance (stimulators), and consumption. What constitutes real goods, the reciprocal of resistance and consumption? Well, a number of things. Real goods is everything made by human activity discounted to include taxes duties and tariffs. Consumption? There's everyday "stuff" that we consume, too. This daily stuff is the junk we buy that wears out or whose value declines to zero in a very short time period. A steak, for example, approaches zero value once its been cooked and eaten, except as perhaps residual value as fertilizer. Reciprocal of resistance is a little more ephemeral in nature. This reciprocal of resistance would include social constructs that are ground into us from the time we begin formulating the meaning of words - about age 1 or 2. Reciprocal of resistance are reinforced by media every day. Media programs that promote a certain lifestyle or consumer behaviors are a form of resistance to a society-wide prosperity.
When you think about resistance to change in this light, you quickly see to the heart of environmental affairs. If there's a gulf between the "retained earnings" potential of the planet (a fixed system) and the effect of high amount of R (real goods, the reciprocal of resistance, and consumption). Given enough waste by government, society in general, and consumers, there will be nothing left in the way of retained earnings. We'll simply regulate, consume, and indoctrinate through sociocybernetic means until the entire worth of the earth is used up and people become extinct, leaving only non-economic life to start over again.
Regulation, restrictions, and consumption has the same effect in an economy that resistance has in an electrical circuit. Waste. In an electrical circuit, resistance causes heat to be generated and lost. Similarly, in the economy, Regulation tends to cause political heat and that's human productivity that gets lost.
Let's do a little thought exercise. If we have an increase is real goods, reciprocal of resistance, and/or resulting consumption, which we call "R", for a given amount of industry "I", we'll need to increase the amount of exchange in order to keep the general level of prosperity the same. That makes sense. And, if we decrease the amount of regulation, and the level of industry remains constant, then we would need to decrease the amount of exchange.
Clearly, in our definition of "R" there is another set of "sub-formulas" to work out to clarify "R"'s components, real goods, the reciprocal of resistance (stimulators), and consumption. Because we are trying to fix a lot of things wrong with current economics, the sub-formulas are in lowercase in the brave new land of Ure/Mazurok Economics.
We can infer that R would be would be quantified by something simple like R = rpg * sch * r
I call this the basic advertising aspect of economics. Consumption reflected in the major term R is equal to the relative price of good (rpg) produced times the consumption stimulated by hype (sch ) that stimulates people to buy it times the regulations/restrictions/and taxes (r) on the product(s).
So we can then take the basic formula E=I*R and say that the amount of exchange in the system should be equal to the amount of industry times this factor R that is made up of the composite behavior of the underlying goods taking taxes, regulations, and hype into account.
How about that: We've already gotten a simple explanation of what happens when a country goes through a period of de-regulation such as the U.S. has been going through in the Reagan-Bush-Clinton-Bush 2 era. Why?
Under these definitions, E=I*R can be restated as:
E=I *( rpg * s * r) and using dummy terms E=1 and I=1 then we can infer that the amount of consumption of real goods produced will be hyped as (rpg * s) as regulation (* r) goes down.
See how much fun we can have inventing economic systems that are consistent with other aspects of life? Simple, no hassle stuff!
In order to flush out this idea that economics behaves way more like electrical circuits than anyone has bothered mentioning before, I wrote to the good people at Integrated Publishing and asked them if I could borrow a handy graphics from their site's excellent introduction to electrical engineering. They were kind enough to grant me permission to use some graphics for this article.
Let's look at how these relationships between P, E, I and R look when we throw some math around:
I'll explain the "P" quadrant for you. That's the upper left hand side of the chart.
We've already been through the first one (starting at the bottom) which is that prosperity is equal to the amount of exchange multiplied by the daily industry of a country (or other economic unit). We can easily infer from this general rule, that the prosperity of a company is also equal to its daily industry times the exchange (prices it charges). Ain't economics easy?
Next up, we see that P=I²R. This means that hype, regulation and consumption "R" is pretty strong stuff when it comes to regulating prosperity. Industry times itself times goods times hype times taxes & regulations gives prosperity. And of course, there can be a lot of exchange floating around, because E²/R gives prosperity.
There are two other important aspects of this analogy that you need to keep in mind. We are only dealing initially with what are called "DC" or direct current circuit analogies. In the real world, the economy acts more like "pulsed DC". The discrete pulses in the DC circuits of economics are called "transactions" by economists. The magnitude of the pulse or height of "E" is determined by how many dollars are involved. The multitude of transactions that happen in the world make it appear that commerce is continuous. But, of course, we all know it is not. It's made up of millions and millions of discrete "pulses". The pulses happen at different levels. There are individual transactions, that may happen less frequently. Up the food chain, there are company or business unit level transactions, and at the highest levels, there are national transactions. You may not participate in the economics system today, because you don't have any transactions, but someone someplace in the country will - and that's why the economy appears to function smoothly.
The second important thing to realize is that terminology and measurement do not necessarily make sense because while we show that regulation & resistance are probably operative in real world economics, how we measure these things is probably way off the mark. I propose we call the standard unit of regulation/resistance a "Ure" (it has the same number of letters as Ohm, so it should be easy to remember) and the standard unit of Exchange an "Ehor" while the other units of measurement (P & I) is something we could put up for grabs to people names beginning with a "I" or a "P". Suggestions that in the emerging ecommerce world that industry "I" be somehow connected to information or Internet, though, will be rejected out of hand.
Market efficiency? Nothing more than the normal seeking of the equilibrium state by large numbers of discrete players.
About Debt, Interest and Creditnodes tm
In carrying the analogy to electricity further, we next come to the problem of understanding debt, interest, the fractional reserve banking system, and the creation of money through issuance of debt. I like to think of this in the same way that one thinks of a capacitor. Instead of the electrical term Capacitor, I suggest that we use the term "creditnode" to describe the operation of banks, thrifts, and markets.
When an transaction occurs, as happens when an "Exchange" takes place [Es in the drawing below] the various credit nodes "charge" - just like electricity charges capacitors, exchange (in Ehor's) charges Creditnodes Cn. Let's say in the example here that we are talking about a big transaction and the money ends up in three repositories: C1, C2 and C3. We can put additional money in additional nodes, such as Ct. More important, we can create nodes pretty much willy-nilly, and about all that is impacted is the amount of "exchange" that is stored latent in the system. Just as a capacitor in electronics holds more (or less charge) depending upon its size, so too, the amount of exchange that can be soaked up in the world depends on the number of credit nodes involved.
There are a couple of things about creditnodes (capacitors in electricity) that you need to understand. It will help if we build a capacitor to explain some phenomena to you. Take two metal pie pans that are the same size. Put one on top of the other so they line up. Now, put a piece of wax paper between them and connect a wire to each one. Friend, you have just built a capacitor.
When you apply a voltage to those two wires that you connected, an electric charge (potential) is stored in the space between the two plates. Once charged up by a voltage, once the charge source is removed, the voltage held between the plates will discharge over time because the space between plates is not a perfect insulator.
Creditnode Losses
In our capacitors as creditnodes, this "self-discharge" phenomena comes from a variety of sources that we could easily quantify (but we won't here because this is not an all-day paper...). Inflation of the money supply (increasing "E") means that "charge" placed in a creditnode some time will produce less prosperity at a point later in time.
This accurately explains why in an inflationary period, you should borrow as much from banks (creditnodes) as you can. That you'll be paying back the exchange medium in inflated (less valuable exchange) works. But given a reduction in exchange, the opposite becomes truth - and so we arrive as the saying "Cash is King" in deflationary times. Exchange borrowed must be paid back with exchange that takes more "I" (industry) create.
(See how this being an economist gets to be really simple?)
In the fractional reserve banking system, what happens is also shown in the diagram above. Assume that the measuring point of the exchange is started at Es when money is put into a bank. As soon as the banks reserve requirements to operate their creditnode is full, it lends the exchange to another creditnode, and so on though credit Ct. In this way, then, the entire economic system becomes something akin to a massive matrix of individual transactions, each resulting from activities of constituent participants.
There is a simple diagram (again with thanks to Integrated Publishing) that operates in the world of economics: It's how a capacitor charges and then discharges over time. The diagram?
What this diagram means is simply that when you apply a charge to a capacitor through a current limiting device (a resistor in electronics, or a combination of consumption somewhat regulated by taxes and the cost of advertising in economics) the capacitor charges to contain so much energy. The rate of charging is determined by the relationship of the amount of resistance to the amount of capacitance, stated as a time constant. As voltage E is applied (at the lower left corner of this diagram) the voltage quickly rises, and then slows its rise until the voltage across the capacitor E is essentially the same as the supply voltage. The current (I) has declined as the capacitor fills up. When the voltage is removed, and a load is placed on the circuit, the discharge curve "flips over". What discharges a creditnode? Well if the node is a bank, the discharge is though either lending (hoping the money will come back in with interest) or alternatively, a bank will "self discharge" like a capacitor in electronics if they don't have enough activity to at least maintain their "charged state". When a creditnode loses it's charge over time, its price deteriorates. This is why the NASDAQ is less a factor in the investment world today than it was several years ago: It's "charge" has been decreased by $4.8 trillion (plus or minus a 6-pack) in market cap.
This is basically what happens in the grandparent of most modern creditnodes: the markets. In order for the economic system to keep expanding, you see how requiring a fixed percentage of gain will require either an exponential increase in the level of industry (I) or an exponential increase in the level of exchange (E) in order to maintain the same percentage of change.
As a practical matter, as the work Ehor & I have done shows, you can ratchet up the last little bit of the curve, between say 98% of full and 99% of full by jacking up the exchange (lets turn on those presses, shall we?) but ultimately, unless you settle for hyperinflation, the game quickly falls apart as exchange comes out of creditnodes to be used in other parts of the "economic circuit".
The fact of electricity is that the dielectric of capacitors is not a perfect space. Electrons that are supposed to stay in their places meander off due to the imperfect insulation between the capacitor plates. Just like inflation of the money supply, or those damn monthly bank charges, over time, no matter how much money you put in a creditnode (a bank or a stock market) there are imperfections in the system (monthly charges) that will slowly eat away at the principal amount. This is the self-discharge concept of wealth.
The Bigger Picture
The last notions that I want to share with you go straight to the heart of the Mazurok-Ure Correlation. What we propose is that long economic cycles are made up of charge/discharge events of creditnodes. Think of interest rates as being the reciprocal of dielectric constants in capacitors. The dielectric constant says here's the quality of the insulation being used between plates of a capacitor.
If a high quality dielectric capacitor is charged, it will take a lot time to "self discharge". With a light load R applied, the R/C time constant will be long and will be mostly due to R. A low interest rate is like a high quality dielectric in this regard.
But now suppose that a low quality dielectric is used. What happens? The same light load of R will discharge much quicker because the capacitor is self-discharging perhaps as fast as the R load. A high interest rate is like a low quality dielectric in this example.
What our work with the Debtberg has shown is that the dielectric material (interest rate) is much less important when the general economy is experiencing a long wave (Kondratieff wave) growth period of 48-83 years. As in the case of charging a capacitor with a big power source, even if the capacitor is "losey", the system will still "charge things up". But when the charging source is removed, a high interest rate (low dielectric loss) will self-discharge much more slowly than a low interest rate (high dielectric loss) in the same conditions.
Last, but not least in this summary of how electronics may be the basis for a better understanding of electronics, is the notion that an economic system is made up of millions upon millions of tiny circuits. In a sense, we are each little "one transistor amplifiers" with our own capacitors or creditnodes called our checkbooks. I know that my checking account has a self discharge effect in it because Bank America charges me a little something for the use of their account regardless of how much I use it. I know that Harrisinvestorline is another one personal creditnode that I operate. We also contribute to a finance company though a creditnode called "the car loan". But that's the only creditnodes we use.
There's a lot more that could (and probably should) be written to explain in even greater detail, and with a little more instruction in electronics along the way, to help you see even more insights into how economics may be more similar than different than electronics.
For example, we could discuss the term inductance, measured in Henrys (symbol L) and discuss how inductance acts like "inducements" in government to invest or save in a particular area.
Or, we could describe for you how series and parallel resonance of tuned circuits operates. These circuits, made up of capacitance and inductance, feel suspiciously like the how the creditnodes and inducements work in day-to-day life. The creditnodes require "charging" and I'm induced to work. This system resonates at a frequency of two weeks. The cycle described has it's zero-axis crossing on Payday.
We could also explain how inducements in series with exchange (E) means we see changes in (E) before industry (I) catches up. Again, to borrow one last graphics from Integrated Publishing's site:
But enough for today. If you've gotten this far, you may be fairly well convinced that in a perfect world, exchange (E) would be ideally lined up with industry (I) in (A) in the drawing above. But, as we all know, when subject to inducements (the equivalent of inductance in electronics) changes in exchange (E), precede the changes in industry (I).
Moreover, we can actually learn something about the phase angle of the Fed's inducements by looking at the lead time of the inducement, such as a rate cut, compared with the change in Industry (I) resulting. We might expect this to be something on the order of 6-months, which would lead us to say that interest rate cuts, or other monetary inducements lead the general market cycle by 30-45 degrees basis a 4-year cycle.
Clearly that is what the Fed means to do in its recent rate slicing. But will it work? Probably not. Because the Fed seems to be largely stuck in the "old world economics" view that all things are not tied together by a single consistent system of logic as in the world of electronics. Yet in the real world, all banks are tied to one another, and all consumers are tied to banks, and all banks tied to governments, which are in turn tied to trading blocks. Certainly this argues that a more complete and systematic view is needed. I propose that the Fed immediately take up a concerted study of how the form of knowledge may be an underlying "way it is". I'd further suggest that if the Chairman wants to go into the history books, publicly promoting a more consistent system of economics in lieu of the formula jungle, would go a long way toward building global stability.
To inject a little humor to it, the Fed is, in a sense, trying to work on the AC ripple component in a very high voltage DC power supply. They may be happy with their ripple readings, but there remains great underlying potential is to do much harm. In fact, unless they take a more holistic viewpoint, and begin using a less complex and more reliable system to understand economics to replace internal self-references and small subset measurements, the results will very likely be.... how shall how shall I say this... shocking?
Mazurok: A Rate Comment
Ehor Mazurok was kind enough to send along a quick analysis of the Fed's latest move, and I thought it only fair that I share this with you:
Decided to check how the MUC formulation would interpret the FED's latest
rate cut. Wall Street was looking for a 50 basis points, but all they got
was 25 instead. So the question I asked, which figure was correct, or if
any of them were right.
Looking back at the MUC work, the equation derived was,
dA/di = (P/i)*(n/(1+i)^(n+1)
where, dA/di was the change in debt economy could hold with respect to a
change in interest. P was the total amount of debt, "n" the number of years
from some reference point, and "i" the interest rate.
Although "P" could be estimated, there is not enough information to figure
out where "n" is referenced to. If that can be determined, then how close
we are to the peak could be calculated. Suspicions are we are close to that
peak, but how close, is still an elusive question.
Irrespective of that, there are ways of shuffling an equation, where some
reasonable assumptions can be made, and as long as any rules are not broken,
a good estimate can be obtained.
We do know the economy is somewhere on the dA/di curve. However, we don't
know where it is. So if we take the difference between two points on this
curve, it should give us an idea if the economies ability to take on debt is
increasing, or decreasing.
Therefore,
dA(m)/di(1) - dA/di = Difference (Diff) on the dA/di curve.
where "m" represents the time difference between FED interest rate changes,
and "i" the last interest rate with i(1) the new rate.
Continuing,
Diff = (P/i(1))*(n+m)/i(1)*(1+i(1))^(n+1+m) - (P/i)*n/(1+i)^(n+1)
Expanding the equation,
Diff = Pn/i(1)*(1+i(1))^(n+1+m) + Pm/i(1)*(1+i(1))^(n+1+m) - Pn/i*(1+i)^(n+1)
next factor out Pn or P*n from the equation.
Diff = Pn{1/i(1)*(1+i(1))^(n+1+m) + (m/n)/i(1)*(1+i(1))^(n+1+m) -
1/i*(1+i)^(n+1)}
Now for some of the assumptions. I suspect "n" to be extremely large in
comparison to the increment "m", so (m/n) is very close to zero, thus the
middle term can be thrown out, leaving,
Diff = Pn{1/i(1)*(1+i(1))^(n+1+m) - 1/i*(1+i)^(n+1)}
Also, the interest rate changes are extremely small, so a broad assumption
can be made where,
(1+i(1))^(n+1) is almost equal to (1+i)^(n+1) for large "n"
Assuming this is so, the Difference equation can be rewritten as,
Diff = (Pn/(1+i)^(n+1)*{ 1/i(1)*(1+i(1))^m - 1/i }
We have no idea what the product P*n is, but we can assume it remains
relatively constant from "n" to "n+m" the next time increment when the FED
rate change is made. In other words we can think of {Pn/(1+i)^(n+1)} as some
"cosmological" constant. The only term producing significant change would
be Delta described as,
Delta = 1/(i(1)*(1+i(1))^m - 1/i
From a CNNfn graphic showing the latest round of interest rate changes,
putting all of this on an Excel spreadsheet gives the following database to
work from,
Date Y - Coord. Incr. "m" FED Rate%
Dec 21/99 1999.97253 .00000 5.50
Feb 2/00 2000.08767 .11514 5.75
Mar 21/00 2000.21918 .13151 6.00
May 16/00 2000.37260 .15342 6.50
Jan 3/01 2001.00549 .63289 6.00
Jan 31/01 2001.08242 .07693 5.50
Mar 20/01 2001.21429 .13187 5.00
Apr 18/01 2001.29396 .07967 4.50
May 15/01 2001.36813 .07417 4.00
Jun 27/01 2001.48626 .11813 3.75
From the Spreadsheet, Calculated data was
Date "m" "i" "Delta"
Feb 2/00 0.11514 0.0575 -0.90211
Mar 21/00 0.13151 0.06 -0.85187
May 16/00 0.15342 0.065 -1.42998
Jan 3/01 0.63289 0.06 0.678616
Jan 31/01 0.07693 0.055 1.440417
Mar 20/01 0.13187 0.05 1.689916
Apr 18/01 0.07967 0.045 2.144429
May 15/01 0.07417 0.04 2.705158
Jun 27/01 0.11813 0.0375 1.55095
Delta results calculated seem to agree with what we would expect! As
interest rates go up, debt, or amount of liquidity in the economy should
decrease. As the FED raises the rate from 5.75% to 6.50%, Delta is negative
indicating this is what should happen. Similarly, as the FED rate drops
from 6.50%, Delta becomes increasingly positive, indicating liquidity
increases with a rate drop.
But Hold on a minute! The last drop of 25 basis points shows liquidity
actually decreased from what was generated in the previous rate reduction.
It went from 2.705158 to only 1.55095. These are relative numbers, but they
indicate the 25 basis points brought in less liquidity than the last round.
What if the FED did go the 50 basis points everyone on the street was hoping
for, what would Delta look like then? Here it is,
Date "m" "i" "Delta"
Apr 18/01 0.07967 0.045 2.144429
May 15/01 0.07417 0.04 2.705158
Jun 27/01 0.11813 0.0350 3.455554
Looks like there would be enough liquidity to keep the GAME going a bit
longer. What this says is that a 50 basis point cut, would have increased
liquidity more than what the last rate cuts. It would have supported the
Wall Street GAME one more time. No wonder they wanted a 50 basis point cut.
So what did the FED have in mind with their 25 basis points. I can only
guess, but it looks like a very cautious stance. It could be the FED is
floating a trial balloon. If the economy is really recovering like some of
the talking heads are saying, then the shortfall in liquidity brought about
by the 25 basis points can easily be made up by the recovery. On the other
hand, if the economy is not recovering, the liquidity shortfall will ripple
through the economy quickly spurring the FED to bring another rate cut.
My bets are on another rate cut SOON!
The only think that I can add to Ehor's excellent report is that we should certainly see the next cut before September 15th. This is because of how little impact the most recent cut this past week had on the markets. With that, let's launch into the charts below. This week I want to draw your attention to the fact that despite all the hype, the Dow managed to lose about a hundred points last week, and is tracking to fall off a cliff this summer right after the holiday.
Now the interesting thing is to ask what could cause the crash to come before "everyone expects" in the fall? Could it be a terrorist attack? An earthquake? Who knows. But the Dow is lining up to take a real header - and soon - as it's continuing to look in Elliott Wave terms like we're well underway in wave C down and this wave down could last some years...that's right....years...
If you're keeping track., we are presently at about the same place in the decline as April 17, 1931, except that the Crash has happened in a somewhat stealth manner.
Money's gone alright. But it went quietly. Or at least it had gone quietly up until now.
All contents (c) 1998-2001 by George A. Ure, MBA, except authors as linked or noted
"Substitution Method of Learning", "Rechargeable Money" and "Traceable Tender" (c) 2001, George A. Ure