A MarketPlace of Ideas                        

Every generation of people that pass across the face of the Earth feel that they are different in some way from the past waves of humanity.   The politician of today imagines they have tools to control the economy that they did not have in 1929.  They imagine they can stave off bad economic symtoms and diseases using fiscal manipulations of their profligate spending and federal reserve policy.    I imagine in 1929 they thought they were more sophisticated than in 1850 also.

                         Each generation thinks it invented music, sex and the stock market.   With 100 percent certainty we are not different than previous generations.  Only our technology has changed a bit.  Thus is there any possibility that the stimulus bail out package will work?  

The very fact that they are not able to predict economic problems indicates their understanding of the system is insufficient.  When I understand a system I can predict its behavior.   Our government is clueless. Thus our government is performing brain surgery with a 12 gauge gun.  The current financial crisis is causing our government to attempt manipulations on a scale never seen.  However large they may be they are not any different than things tried in the past.  As Einstein said it does not take talent to make something bigger.   When George Bush warned about  "too much government in markets"  he was correct.   He could have used the old phrase "too many cooks in the kitchen" and made his point more effectively.  The government is not only too many cooks but the wrong bad cook that likes to sprinkle arsenic in the soup.

We think we are different.  Everybody in the past has thought the same thing.  Its a natural human mode of thought.    From this perspective it is almost certain the stimulus bail out package will not work.  On the contrary it is likely to slow any improvement in conditions.  In a set of conditions we are under the normal political response is guaranteed to be the wrong one.  If history is a guide whatever the politicians do is going to be the wrong under this set of conditions.

After all is said and done SOMEONE has all the money that the companies needing bail outs lost.  Should we not be following them?  They made the correct moves.  Instead we are subsidizing the losers.  We are wiping the ledger clean for them.  The distributed accounting ledger that is our money system will lose its memory if they dilute our currency sufficiently. 

But politicians do what politicians do.  They have responded reflexively.   I imagine there is nothing that can be done.  It appears to be unfolding unconsciously.  Like a doppleganger zombie they shuffle.  If they were the least bit awake their solutions would have a hint of creativity.  I have spotted absolutely none.

In this situation we are better off doing nothing.  Try telling a political zombie that. 

You want to use mathematics of some type to model behavior of the economy.  How to do this?  A model uses carefully simplified descriptions of systems to attempt to predict the future.

What the economic system is?  I propose a herd of cattle.  Why?

• generally travels in groups - behavior is correllated
• is unaware of the overall trend of movement of the group.  Is it moving east, west, south or north?
• can stampede - a boom
• can be stampeded by fear
• movement can be manipulated by the cowboy - Models the command nature of economy.  Cowboy directs the cows but if the cows only knew they would be in charge.  This day is coming soon.
• cattle are considered property of the cowboy - They direct the work output
• Assume cattle are not slaughtered but rather tied to carts they pull to yield useful work output
• large numbers of individuals results in statistic behavior of the group that can be measure

Linear system behavior

In linear mode small perturbations of the system result in predictable results.  Example: Lower interest rates lead to more business activity investment.  This is the small move results in predictable change in output regime of operation.  This is the one you understand intuitively.

Nonlinear system behavior

 This is the regime of operation that is many times counter intuitive.  How to understand this?  The mathematics of nonlinear systems is very complicated.  However nonlinear systems can be characterized.

What are the nonlinear system parameters?

• trust  versus nontrust
• unduely scarce resource - bottlenecks in the economy
• low inflation - High inflation - currency debasement
• deflation
• Decorrellation of behavior 

What modes of nonlinear behavior are there?

Boom - Grazing cattle move logically from grazed pastures to ungrazed ones.  One cow follows another.   Correllated behavior is in order.  The cows are fat and happy.

Bust - Green pastures within easy walking distance are exhausted.  Chaotic decorrellated behavior is in order because none of the cows know which way to walk.  Green pastures are out of sight.  The cows are scared.

What is happening now?

The system is being flooded with excessive liquidity in a blind attempt to stimulate.  The size of the stimulus guarantees nonlinear results.  As the economy plunges into the deflation region it normally receives a stimulus from price moderation.  It is likely it will not receive this effect now because of the excessive printing of United States dollars.  Oil has come down in price but any commodity would come down further has this system flush not been attempted.  There are only two outcomes.  

1. Reserves of capital will have already been expended.  The prices of goods and services will be higher due to accelerated inflation.  The economy will be at a low level of activity and remain there because the inflation will cause the monetary system to forget who made good decisions.
2. Reserves of capital have already been expended however someone has that money and are saving it.  When economy starts again inflation will restart very quickly due to the liquidity injected into the system with no underlying economic backing.  This will lead to another wave of failures and mistaken attempts at bailouts.

Neither outcome is attractive.   The sole effect of the bailouts are to only to dilute the remaining functioning businesses ability to deploy capital effectively.   At these levels the liquidity with have the same effect as raising taxes. 

Is there a better solution?

This is an inherently nonlinear move in the economy.  Linear methods are inappropriate at this time.  Any moves by Washington are not going to help.  The moves made in Washington will be ones that aggregate power at a time where the failures including the government should be divested of sizable fractions of their power as calculated by the market economy and loss of assets.

We would probably be better placed to just let this recession happen rather than fight it.  We only delay the inevitable.  At the same time it appears we are trying to institutionalize the previous winners in the game.  We are trying to make them "winners for life".  I do not know anyone who would think this is a practical idea.

The next boom / bust cycle is already in the cards.  Our wizards of smart politicians in Washington D.C. have insured that with a tanker load of fiat issued scrit paper money.  So what is my prediction? It goes like this

1. Next year … 2009 will be a very slow year for business.  More bank failures.
2. Some time in 2010 probably late in the year the economy will start to pick up
3. mid 2011 the economy will pick up steam.  It will start a powerful wave of inflation ( just as the politicians want! )  This wave of buying will beget more buying as people race to buy in as momentum takes everything higher.  You won’t have any actual more value in your hand for your assets.  You will just have cash that is worth less because of the inflation.
4. The consumer will die out promptly …….more quickly than even this time round in 2008.
5. The next bust will be even bigger.  The government will have less power to affect outcomes.  Foreign nations twice burnt will swear off investing in the USA
6.  The amplitude of the swings have been getting bigger each time we cycle through.  
7. Quite possibly the next downturn will be a depression because of the increasing amplitude.  This will happen because of 2 factors. #1 is that people’s spending power will be decreased. Savings having been devalued so by passage of time with severe inflation.  #2 Interpersonal trust will be so corroded from the debasement of the currency.  People will feel this on an unconscious level because of the corrosion of value of savings / currency
8. The politicians of the left will like it because we’ll all be reduced to feeding out of the palm of their hand. A mere whimper on their part and  you will be left to starve on your own for not being an upright socialist.

Washington politicians can put up with anything except the possibility of losing power.  And you keep electing so many of the same ones over and over.

Why do you think that there will be any better use of bailout money than the money squandered during the boom.  Arguably it will be spread around less efficiency since the government is doing it and it is "easy money" even more ripe for abuse than the original cash.

"Money Quote" from Bernanke -  There will be no need for the federal reserve to monetize any of this borrowing I do not expect any additional inflation from this.  Dumb!

Ron Paul exchange with Ben Bernanke.    There will without a doubt be inflation because of this.  They are risking collapsing the system because everyone in a position of power is scared white of losing power.  This is a totally unhealthy way to live.

And Wall Street is only interested in getting their chestnuts pulled out of the fire.   As Ron Paul said "They are going to have to add a bunch of stuff into the bill to get it to pass"

You can not regulate yourself out of easy money.

When I first went to Brazil the exchange rate was 3 reals per 1 US Dollar.  Over time the dollar had decayed to the 1.5 to 1 level.  I checked the exchange rate yesterday thinking that the rate might give some indications of the future.  I was shocked to find out that the dollar was slightly north of 2 : 1 yesterday.  Today it is 2.2 :1.  Very strange indeed.  What could the possible reasons be?

• stealth investors have their money outside the country and there is a panic ?
• gov’t trying to stimulate economy ?
• commodities cratering ?

This sort of gyration makes it so it is impossible to plan new business and very very difficult to maintain old business. 

Brazil USA Exchange Rate

The rate of fall of the graph is nothing short of harrowing.

• In the 1970’s we had a sequence of recessions due to rapidly rising oil costs alone.
• In 1990 we had a recession due to a bust in the housing market alone.

We now have these together at the same time.  We should have seen it coming.   Ever since the 70’s we have been skating on thin ice.  Too dainty were we to drill on our own soil.  It was only a matter of time before we got our tails caught in the wringer.

Following standard remedies the following would happen

• housing bust ? - increase liquidity 
• oil spurt ? -  increased liquidity is bad - as money is more available oil prices rise.  Decreased liquidity is needed.  But that slows economies and exacerbates a housing bust. 

Our economy is effectively stuck in a ditch.   In one direction the ditch wall is made up of the housing bust liquidity and in the other direction the ditch wall is made up of the inverse relation of oil and liquidity.

The gears are already grinding to a halt. Credit liquidity is drying up as of this writing in September 2008.  As already noted I predict a serious bust for 2009 on the basis of my conversations with various business people.

We are in serious trouble.  This situation will not be remedied until we start drilling like wild men.  Alternative sources of energy are just not mature enough to fill the gap quickly enough.

Most people know about the "Great Depression" of the 1930’s.  However what most people do not know is they know of this one because mass communication was available then.  Previously in the United States has undergone other less publicized economic turmoil.  Thus the phenomenon of economic depression is not as uncommon as one might think.  Here is a partial list:

• Long Depression  - some say 1873 - 1893 was one long depression.
• Great Depression
• Financial Crisis   -  See the following topics
• Panic of 1819 - pervasive USA economic recession w/ bank failures.  Book on the subject: The Panic of 1819, Reactions and Policies
• Panic of 1825 - pervasive British economic recession in which many British banks failed, & Bank of England nearly failed
• Panic of 1837 - pervasive USA economic recession w/ bank failures; a 5 yr. depression ensued.
• Panic of 1857 - pervasive USA economic recession w/ bank failures
• Panic of 1873 - pervasive USA economic recession w/ bank failures; a 4 yr. depression ensued.
• Panic of 1893 - pervasive USA economic recession w/ bank failures
• Panic of 1901 - limited to crashing of the New York Stock Exchange
• Panic of 1907 - pervasive USA economic recession w/ bank failures
• Kondratiev_wave - This may be economic theory’s version of U.F.O.s but it does predict a downturn at the correct time
• Austrian_Theory_of_the_Business_Cycle - Theory that states bubbles are a result of central banks setting interest rates artificially low -  Sound familar ?  Read this arty because it describes the economy very well.

Likely you have heard this old adage about security and liberty.  The security they talk about is economic.  Things are likely to get tougher in the near future.   We are shipping too much money out of the country for oil.   We are too dainty to allow it to be drilled on our coasts and in ANWR.   Thus things will deteriorate more until the pain threshold is found. 

Many people will want to vote for the politician that says it will be ok if we only regulate this or tax that.  These are the unDemocrats who will say anything to get elected.  Say anything to get the power.  I would like to think you as an electorate will have the sense not to listen.  But I’m doubtful about this.  You listened in the past and you likely will in the future.   The problem is this sort of thing never helps economically and in fact damages something much more precious than your temporary economic circumstances and that would be your liberty.  I know this is true.  My favorite home away from home country is Brazil.   As currently constituted Brazil has a fully implemented form of government that the unDemocrats want to have here.  The people know their government and changing it is hopeless.  Nothing will ever change in that area and the Brazilians know it.   With liberty you can improve your economic circumstances.   With economic wellbeing you can not necessarily do diddly squat about your liberty.  I know its tough to be a good soldier.  You have to be brave.  And clearly about 50% of the population lacks any impulse toward liberty. Quite the opposite.  They lick their chops at the thought of another round of incremental carving up of liberty for the sake of financial gain. 

Remember losing a job is temporary.  Living in a land of curtailed liberty is pretty much for your entire lifetime.    So don’t be dour Gus Halls who secretly long for a beer, a recliner and a black and white television.   For an inspired life you have to dream of liberty.

For you environMENTAL cases you can build your own wind generator.  You can see all the information you need here: www.otherpower.com/otherpower_wind.html

Very interesting and fun designs.  What’s stopping you liberals?  The earth is warming!! How can you NOT build one of these? 

The nice thing about this set of likely Bush - Haters is that at least they appear to be walking the walk instead of just telling me what I ought to do.  And they appear to be scientifically truthful…. it’s not likely to be cheap or easy or cost effective if you already have grid power.

The engineer in me wishes he had time and space to build one.

I stopped in at the Guadalupe Farmers market on the way home from my run today. I talked with my friend Fred the proprietor.   He told me his friends that are also in business are reported marked slow down.  Perhaps more than just a recession but a depression.

He then went on to recount how his grandfather "owned" a town in New Mexico during the depression.  He had 13 kids whom he all sent out to work during the day.  They all made on the order of 100 US dollars per day.  That was huge money during the 30’s.   He never kept his money in the bank.  He would hide it in various areas whether it be buried or hidden in a heavy duty shed made of railroad ties.