Archive for the ‘Nonlinear-Systems’ Category

Economist and Economic Modeller Steve Keen showing instability inherent in high debt economies

Monday, August 24th, 2009

Video Notes

  • I have seen this kind of stability analysis applied before.  It is valid for circuits and system functions – I would posit it is valid for economic systems
  • When economies start using debt to drive employment things are ok for a few economic cycles – then you hit a last cycle when debt taken on is huge – the economic levitation ends – the economy shuts down.
  • The blue trace with loops is a tracing of oscillator "squegging" as we call it in electrical engineering – parametric modulation
  • because private debt levels are so high private deleveraging can overwhelm government deficit spending
  • writing off the bad debt – a.k.a. recognizing the bad debt is the only solution
  • to stabilize the system the system should be tweaked to limit the amount of personal debt individuals are willing to take on – base housing loan prices on rents you can get for said house instead of what appraisers conjure up
  • Full talk at the Whitlam Institute is here
  • The associated PowerPoint presentation is here

 

Nonlinear Modes of Economic System Behavior

Monday, November 10th, 2008

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.