May

27

Political scientists, commentators, and pundits consistently observe that government leaders usually opt for silver rather than lead when presented with crisis or conflict. If a ruler can pay coin instead of fire bullets, he or she is likely to do so. Commonly referred to as political instinct (or emblematic of human fragility to include corruption), such decisions often equate to deflection or redirection of what is tantamount to injustice, be it economic or political, that continues if not escalates.

From a rules-based (or Quantitative Relativity) analysis, we may conclude that the ten-year-old repeal of the Glass-Steagall Act is the Fort Sumter of a revolutionary period in the history of capital markets. Colliding and colluding energies then generated by investment banking and commercial banking interests created a black hole, from which the centricity of capital flows and the ergonomics of investor, trader, and speculator no longer appeared (or disappeared) on some 78 year-old, well charted maps of domains circumscribing public policy and regulatory stricture as well as academic and institutional dicta.

Accordingly, magnitudes of relative space and time correlations of the markets may now extend well beyond the comprehension of a single person. Thus, before considering the Chair's interrogatories, first consider whether the sage's musings are sagacious or merely in keeping with a (if not thee) central stakeholder that owes a fiduciary duty to those who may be keeping afloat with what otherwise would or should be sinking if not already sunk…

What did the guy actually say?

"Our first stimulus bill … was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in … as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."

"I think that a second one may well be called for," Warren Buffett, the CEO of Berkshire Hathaway, told "Good Morning America" today. But, he added, "you hope it doesn't get watered down in many ways."

"I do not like the idea of any kind of a plan involving the government where Wall Street makes a lot of money. My plan provided that they would make no money whatsoever, and the American public would make the money. I just think that Wall Street owes the American people one at this point," he said.

"We are not in a freefall, but we are not in a recovery either," Buffett said. "We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behavior. That change hasn't changed." The U.S. unemployment rate, which currently stands at 9.5 percent, still "has a ways to go" before it peaks, he said. His own company, he said, had to lay off 500 people.

See http://abcnews.go.com/Business/story?id=8039651&page=1.

What are the natural reflections engendered by such an utterance as the sage's?

Hey, Big Spender, Spend a Little Time with Taxpayer Dimes: "The Keynesian stimulus is beneficial insofar as it gets to average consumers, but much of the money is headed elsewhere; perhaps overseas to buy commodities, gold, etc., for as few opportunities for profitable investment are within the US consumer economy, money will be attracted elsewhere. Moreover, but for alternative energy, even skillful application of Keynesian stimulus spending cannot return to the previous path of economic expansion for long without cheap oil.

Keynesian stimulus is a governmental policy that borrows economic demand from good times and uses the proceeds to boost demand during times of contraction, to keep recessions from deepening into deflationary depressions. Public spending by the US government on public projects is meant to restore demand missing due to contraction of the private sector of the economy. If there is enough public spending, a multiplier effect helps stimulate demand and revive consumer optimism.

In terms of the scale of the government money being introduced to stabilize the economy, it is mostly going to bailouts, low prime rate credit, and existing entitlements, with a relatively smaller amount of Keynesian stimulus. With the domestic consumer market so depressed, the easy credit offered to the banks now tends to leak out of the US and head abroad, without creating many domestic jobs in the process.

The near zero prime rate money available to the big profit-starved investment banks will probably be used to shore up their troubled bottom line with high-profit loans, lending for things like foreign subsidiaries of US corporations, commodities including gold, oil production, and growing markets in emerging nations. Some prime rate money is being borrowed and then used to buy higher interest paying US treasury bonds, giving guaranteed profits but no jobs."

Harbinger From 'Flash Crash' to Slow Motion Crash: The scale of existing obligations on the part of US consumers, the many federal obligations and entitlements like health care and social security, and private bank debt taken together is an overwhelming tax burden for an aging unemployed population.

Given the peak oil situation, it is unlikely that this aggregate burden of US debt can ever be paid back with dollars that retain their current buying power. This reality leaves a choice of either US government default, or more likely in the short run, devaluation through inflation that keeps the finance books balanced with shrunken dollars.

The historic evidence strongly points to solving our debt problems with inflation, which is a concealed form of taxation. Here political policy takes over."

Electile Dysfunction: "Economists in a recent National Association for Business Economics survey say the economic recovery was not helped by the stimulus bill. Obama's $787 billion Recovery Act is a massive slush fund for "saved or created" jobs, a term still undefined. Additional $17.7 billion jobs bill is on track to do what the Recovery Act did - not much. National unemployment rate will remain hovering near double digits despite Obama's promise the Recovery Act would keep it below 8%.

Back in early January, when Barack Obama was still President-elect, two of his chief economic advisers - leading proponents of a stimulus bill - predicted that the passage of a large economic-aid package would boost the economy and keep the unemployment rate below 8%

Obama's Disco-era Jobs Bill is so named since the meat of it comes directly out of Carter's bill from 1977, a bill that economists still aren't sure actually worked. The initial $787 billion Recovery Act, with funds borrowed from China, was reassessed by the CBO back in January, increasing the actual cost of the stimulus package to $862 billion due to several factors including higher unemployment, the food stamp program, and the Build America Bond program, which pays state and local governments for 35 percent of their interest costs on taxable government bonds issued in 2009 and 2010 to finance capital spending.

The CBO outlined the increased national deficit burden of the stimulus package in this easy to follow and fun-for-the-whole-family-since-the-whole-family-will-be-saddled-with-massive-debt. White House's Council of Economic Advisers says on track to create or save 3.5 million jobs this year."

Job One: Given that he highlights one key indicator, Buffett's comment on unemployment provides a context for our "natural" correlations, priori, consiliences, etc.

"Regarding one's ground zero opening that "the low of the day was below the low on the Flash Crash day, note the extended declines Thursday came after initial jobless claims rose by 25000 to 471000 with a large part of the US domestic economy to be in a state of deflationary contraction as true US unemployment rate approaching that experienced during the great depression.

As an economic system constantly interacts with the politics that makes the rules that govern it, politics may prove to be anything but an efficient way to achieve rational change. Increasingly, global economic options may be narrowing to choice between continuing global economic stagnation versus a short start at recovery followed by a relapse into economic contraction and global stagnation. Therefore, use of stimulus spending or any other political and economic policies cannot reset prior economic growth within the short-term.

The return of another tight global oil market will be accompanied by the return of the crippling oil price increases we saw in mid-2008, but this time imposed on a weaker economy. The geology is the easy part, but it is the complexity of the social response that makes peak oil difficult to study. The economic crisis is resulting in gap between global growth predicted by banking and finance system versus disappointing performance of the global economy; the shortfall is reflected as political discontent.

US domestic economy comprised of two consumer spending sectors with different characteristics. Discretionary spending is shrinking fast as the jobless and the growing numbers of those fearful of income loss limit spending to the purchase of bare necessities; it with nondiscretionary are averaged together may present a misleading consumer price index, which excludes food and energy.

Whereas labor and services costs are determined by the supply and demand within the domestic economy, commodities typically have their prices determined by the global marketplace. When a tight global oil market returns, it means that the rising cost of oil needed to transport almost everything pushes up all other commodity prices — termed cost-push inflation.

If the non-discretionary sector of the consumer economy is deflating, due to slack demand and home prices decreasing, it does not mean that the same price trends apply to the non-discretionary sector. US domestic economy is stagnating while the global commodity sector is seeing price inflation.

Housing and labor prices have been falling, even as global commodities prices are rising, to give a misleading picture of inflation. These trends taken together signify stagflation, which tends to defy easy economic remedy.

As US consumer spending relatively shrinks, there also seems to be a global commodity price bubble attracting speculation and driving up many raw materials prices. Commodity prices in general have risen about 30% since March 2009; the price increases may now be spreading to food.

Retailers such as Wal-Mart Stores Inc. are cutting prices to bolster sales as customers face almost 10 percent unemployment and rising foreclosures. Yet bad news feeds on itself, and this circularity perpetuates a deflationary downturn during hard times."

Meanwhile, aside from the obvious, being repeal of the Glass-Steagall Act separating commercial and investment banking, there was the stealth HTM to MTM change. Conjunctive to MTM, the derivatives market operated as a shadow economy intended to disperse risk among bank held and capital markets held assets, supposedly stabilizing values related to medium and long term contracts. So much for that theory…

As a result, post-crisis bailout of banks continues as the most expensive component of the legislation, as one commentator notes, not so "much a cost as it is a theft… a sort of Robin Hood in reverse… Bernanke & Co. are stealing money from the common man and giving it to the banks…."

[Ed. A more complete version of this essay will be published shortly].


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2 Comments so far

  1. dave whitesel on May 30, 2010 9:16 am

    Mr Dimmick, this is an excellent piece! Looking forward to the complete version.

    What impresses; 1. Your skill in characterizing the market within social system boundaries.
    2. Your use and references to quantum economics as part of Discovery, which counter programs prevailing assumptions postured within classical boundaries of probability outcomes.
    3. Your proper call that Peak oil wont go away, even though it should have been killed, before it ever took root.
    World oligopoly has arranged the current board in such a way that this templates utility retains its value but now as a side show.
    4. Your proper characterizations about The political element skills at rule insertions, to favor supposed forward conditions of goal seeking politicians, is spot on and illustrates the capacity of current crops to arrange conditions for al gore like, post political productivity towards wealth creation.

    We know that all systems are only as good as thier sensory organs…that conditions in the now, are playing a script against this Next clock; where the hoped for ignorance of most of the people, can be played like another symphony.

    We also know that each systems success under its clock, is subject to the degrees of its fiction. Momentum from one clock carries over to the next, creating the illusion that the last clock cycles variables, favor if not ensure, this current clock cycles success.

    Is this not the root of the hubris whithin any system?

    Compartmentalists who are the functionaries for sustaining systemic momentum, operate on demand. They lack any degree of freedom to counter program the distributed systemics. They operate within the limitations of need to know. Which by itself increases the fiction present within the framework of the projective, applied responses.

    When awareness of these factors, has filtered down to even my level…where even my own simple awareness of the necessity of the wave function, as sole defense against a system whose motion is anything but friendly…hope may resume too spring eternal.

  2. douglas roberts dimick on June 1, 2010 2:41 pm

    Dave, thank you for the kind words…

    As a matter of disclosure, note that your first two observations are directly attributable to my self-conceived distance learning program studying here at daspec under the tutelage of Victor these past two years while I have been living in China. Thanks V.

    Observations 3-4 directly track to nine years of developing my Theory of Quantitative Relativity for coding my SMART program trading and portfolio management system. Again, I hope that my time will come when I have the chance to launch it under the direct supervision of our chair.

    Your comment about sensory organs relative to scripting behavior (or space) relative to time is right on the mark. You state: “Present day Alternation algorithms provide little in the way of rational insight, because of the omission of Valuation within the parts of the distinguishable sums…” relative to your comments on Nash Equilibrium.

    You are right, which is where the algo-guant tribe has failed, so fleshing out our mutual observations regarding their “illusion” as to cyclical variables – much of Victor’s work clearly leads us to such conclusions about those “Compartmentalists” and their hubris. Sporting a rules-based approach to quantitative impressions of market behavior, I cannot agree more.

    Are you the Dave Whitesel who is a Bass Fishing King in Brazil? See http://www.peacockbasstrips.com/MonsterClub.html.

    dr

    Ps. Your data was impressive at http://www.dailyspeculations.com/wordpress/?p=4758. From a perspective of relativity, your “level” is well above my station in this dialogue.

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