Posts Tagged ‘complexity theory’

Keynesian Economic Crystal Meth

Thursday, March 17th, 2016

Dear Friends,

It seems to me, economists have been seeking the holy Grail of nonstop economic growth for as long as there have been economists… but as with all natural complex systems, the economy must expand, sleep then expand again. The expansion part of the cycle is where new ideas are implemented, and the recession part is where old inefficient ideas are destroyed, to free up the resources for the next wave of new ideas. Like an animal or plant, an economy grows rapidly for a while then sleeps. If someone were to force a plant or animal to stay awake forever, as speed addicts do, the animal or economy becomes sickly. Economists and politicians want the laws of economics to bend to their will but like all of God’s laws they do not lend themselves to bending.

A politician may want to be able to eat belladonna, but no matter how much they might want to, the moment they do, they die. Someone else might want to fly without wings but jump from a towering cliff and God’s law of gravity enforces itself. The point is, God’s laws are not flexible, breaking them always has consequences. No matter if someone poisons himself, jumps from a cliff or snorts crystal meth to stay awake, God’s laws do not broach noncompliance. Trying to force an economy to only grow is just such a violation of God’s law of economics.

Great depressions are caused when government backed by economists try to stop the boom bust cycle of economics. FDR turned Herbert Hoover’s recession into a great depression by trying to force economic growth by fiat. Following Keynesian economic theory, Roosevelt attempted to force economic growth by controlling how much and what a farmer could plant, determining the prices retailers could charge, employing people to do absurd things like count the tips on maple leaves and huge government paid for engineering projects. What he got was a depression that lasted for a decade, soup lines, mass unemployment and a dependency class.

Obama and his economic brain trust have attempted the same thing. He has had the good fortune of having a federal reserve that has kept interest rate at or near zero for the entirety of his term, he has run up a deficit greater than all the Presidents before, he has passed reams of new regulations and usurped a third of the national economy with the Affordable Care Act. Meanwhile, like FDR, he has had a fawning media cover for him at every turn. Today, the soup lines are hidden by food stamps which is at an all time high, the unemployment numbers are massaged by the BEA with terms like U6 unemployment, virtually all the jobs that have been created are low paid part time work and the stock market has expanded because of firms buying back their own shares, on margin, instead of organic growth by investors.

Now the latest gimmick the brainiacs are trying are, negative interest rates, helicopter money, bail ins, and banning cash. Negative interest rates are already being used in Europe and Japan to push demand. What they are, is exactly what it says, savers are charged interest to stash their money in a bank or by buying bonds! To keep people from pulling all their savings from the banks and setting on cash, which would drive the banks out of business, the masterminds want to ban cash. Helicopter money is where the Federal Reserve would print a few billion dollars, lowering the value of all the money now in circulation, and deposit it in people’s bank accounts. If all that fails to save the economy and threatens the banks, those of us who have saved money will have our money withdrawn from our bank accounts, and given to the banks.

Methedrine can make a tired person wakeful, the negative side effects will manifest themselves sooner or later. Keynesian economics, or demand side economics, is like using crystal meth to keep the economy awake even when it needs to sleep. There are two competing philosophies of economics that don’t seek permanent economic growth, the Austrian school which stresses the effect of savings on an economy, and Joseph Schumpeter’s boom bust theory. The Austrian school’s theories have only been used twice in the US, once during the 1920’s and then in the 1980s. The result was fast economic growth with short weak recessions. Meanwhile, every time Keynesian crystal meth has been tried, the long term effect has been depression and outright economic collapse. Gods laws cannot be compromised, no matter how smart a brainiac is, or how much she might want to. Isn’t it time for politicians and economists to grow up and follow the laws of economics? Just say no, to economic crystal meth.

Sincerely,

John Pepin

I Pencil and Complexity Theory

Monday, October 14th, 2013

Dear Friends,

 

It seems to me, the most commonly known analogy in economics is, I Pencil. This narrative shows that the capitalist system produces things of such complexity it would be impossible for a central authority to do it. Moreover this story illustrates what can be produced at extremely low cost opening up their availability to the masses of people. What is not well known about I Pencil. is that it also illustrates the complexity theory of economics. This is a very important point that the writer of I Pencil couldn’t have known because complexity theory had not been invented. What makes this important for the average person to understand is that it shows the futility of government control over an economy. If we as a people understood this very important concept, we would stop undermining our own economic prosperity by electing progressives, who only seek power and authority over everything.

 

I Pencil. is a story of how a pencil comes into being. If you or I set out to make a 10 cent pencil the cost to us would be extraordinary. The cedar in a pencil is from the Appalachian mountains, the graphite and glue from where ever they are cheapest made, the paint from China, the eraser from rubber made in south America and the brass ferrule from who knows where. For you or I to gather all these components and assemble them into a pencil would be prohibitively expensive, yet they are produced by the market system so cheaply they can be thrown away, if the eraser is worn. All the inputs are from diverse parts of the world, made by diverse people for diverse reasons. The point is they are all available to the capitalist to produce something that is fundamentally different in kind from the original inputs.

 

All of the advancement of Western society has been through the innovation of the market system. Innovation that is made possible by the diverse products the market provides. As new products are made available by the market more innovations are available to the entrepreneur. If graphite were not available the pencil would not be possible. People, not governments, make innovations. Governments stifle innovation through regulations that, while well meaning, serve to undermine the availability of new products. This is usually done to protect some job or politically favored industry. The result is always lower wages, lower productivity and high unemployment. All add up to a lower standard of living.

 

The various inputs to a pencil are manufactured probably for other reasons than to make pencils. Glue is made for furniture and a myriad of other reasons by the glue industry. These divers industries can also be considered components in the complex system that is the market or an economy. These diverse actors in the economy are interdependent, are able to learn, they communicate, and they respond to their environments, IE, the demand for their products versus the cost to manufacture them. Firms within industries are another example of complex actors that lower the granularity of the approach. Each has an interest in creating new products that can be used in new ways.

 

As new products come onto the market more products can be made or perhaps made cheaper. Like the mechanical loom made it possible for the laborer to have a wool coat, because coats became cheaper, new products allow entrepreneurs to come up with new products and services that further improve the lot of Man. The new products are different in kind from the inputs. Like a pencil is different in kind from rubber sap, graphite or cedar, new products that could have never been predicted emerge from old and newly made available products. No one ever born, let alone a bureaucrat, could have predicted that an innovation devised by Bell Labs, the transistor, coupled with another Bell Lab invention, PCM, would enable the innovations we live with today.

 

Just as the digital computer is different in kind from the transistor the transistor must have been invented before the computer would be possible. The original innovation as well as the emergent innovation could only come about under a system of bottom up emergence into a viable product. Once government eliminates the complex system of the economy, breaking it to the whims of the political elite, innovation will necessarily stop. The standard of living of the people of the world will stagnate and then decline. We see this in every nation that has risen up under capitalism and fallen under socialism. England used to be the world’s super power until it destroyed itself with socialist regulation. Japan rose under laissez fair capitalism and now is grinding to a halt under socialistic friction, Hong Kong has maintained laissez fair market regulations and continues to see a steady increase in the standard of living of it’s inhabitants as well as huge immigration.

 

The best way to understand this fact is by watching human emigration. The mass of people move from places where the markets are limited by regulation for whatever reason, socialist, religious, protectionist or any other, to places where the market system is more free to work. That they often undermine the market in their new homes by calling for protectionist measures, socialist “fairness” or demand religious exceptions, is a tragic consequence of freely moving people. That governments go along with these anti market regulations is a sure sign of the decline of that nation. Soon the people will vote with their feet to leave that weakened magnet and are drawn to the new country that has embraced laissez fair. Let it work, should be the motto of every nation on the planet, because it works.

 

 

Sincerely,

 

John Pepin

A Solution for Too Big To Fail.

Thursday, January 24th, 2013

Dear Friends,

It seems to me, the too big to fail dilemma gets worse, every time our legislators have a go at it. The Elite’s regulations always result in pernicious incentives that, instead of preventing banks from becoming too big to fail, actually create the conditions where banks must become too big to fail, else they cannot compete. The new regulation bears such an associated cost that it makes small banks uncompetitive, not due to market forces, but to regulatory causes. Of course, the Elite only take, they never give, their solutions are always more regulation, as we have opined in the past, so their solution must add to the problem, no matter how well crafted their regulation is. This increases the chance for great disturbance to our financial system. The same system your 401K is invested in, as well as your checking account, your savings account and any other account you have of M2 or M3 money. This makes the too big to fail problem your problem too.

Too big to fail is a result of old bank regulations, passed in an earnest effort to solve issues that became apparent after the 1929 banking crisis. As with all regulation, it created more problems than it solved, requiring more regulation. Banks actually create money, just like they had a printing press in their basements, but to create money, they need to have deposits and make loans. Obviously, creating money is a strong incentive to bankers to get deposits like, checking accounts, savings accounts, money markets etc… All a bank’s insured deposits are guaranteed by the Federal government through the Federal bank, (The Fed).

Banks are required, by regulation, to have a certain amount of the money deposited in their bank available as M1 money. The theory is, in normal times, a bank will never see 10% of it’s deposits withdrawn in a day. The problem is… our economy is a complex system. In complex systems, rare events graph in long tails instead of bell curves. Very unlikely occurrences are not only possible in complex systems but are certain. Because of this, there are times when more money is demanded than the bank can produce, if that happens the bank is in bankruptcy and must close it’s doors. It becomes the property of the Fed, it’s assets sold, and it’s debts paid. The Fed then insures every depositor’s first 200K of money if the assets don’t meet the debts.

When a bank becomes too big to fail it means that if it were to fail and go bankrupt the entire economic system would be put in jeopardy. The daily debts and outlays of a tottering, too big to fail, institution would be disrupted if it were to fail. Checks would bounce even though sufficient funds were available, paychecks couldn’t be cashed, large money changers could be shut down for a period of time like PayPal, inter bank payments would be disrupted, and the Fed would be handed a steaming pile to deal with. This could lead to a cascade of possible bank failures as the debts one bank owed another were disrupted by failures causing more failures. Banks that survived the first round would stop lending and hoard assets to stay alive. The entire monetary system could collapse if this were to happen… and it almost did! The 2008 banking disaster could very well have led to the very cascade of bank failures I have explained.

Therefore, a bank that is too big to fail will be bailed out, no matter how far off the rails it goes. This gives their debt issuance the implicit backing from the US Government, further exacerbating the problem. Because a smaller bank doesn’t have the implicit backing of the government and so must pay a higher rate on it’s debt! Plus a higher regulatory cost to nominal deposits makes it a virtual commandment for all banks to get… too big to fail! If you think about it for even a moment, even a fool would realize, we need to get a handle on the too big to fail dilemma.

The answer is as simple as it is hard for the Elite to swallow. Remove as much banking regulation as possible. Leave only standardizations eliminating regulations. This would level the playing field for the smaller banks and credit unions. Then, determine an upper level of bank holdings, that would make a bank become a systemic risk. Reduce that by 10% and set this as the upper limit for protected managers. Banks would be allowed to grow beyond this limit, but if they failed for any reason, the board of directors, the president, the CEO, the CFO and all the vice presidents would go to jail, even past bank officers up to the time the bank passed the limit. They would serve not less than 4 years and no more than 10 years. Make the law as simple as possible with no wiggle room for an especially weaselly CEO to worm through. Make them personally liable for the bank’s solvency if it grows past this point… and it won’t.

The self interest of every member of a bank’s board of directors will make absolutely sure, every bank in which he or she is a member of the board, will remain well under the limit. No bank president will allow his or her bank to grow beyond the limit, and top quality candidates for vice presidents, will be non existent. This would solve the too big to fail problem simply and efficiently. Our economy would be allowed to grow at an expanded rate due to less regulation, money would be more available to small businesses and entrepreneurs because small banks usually lend to these important economic actors, and a major systemic problem will have been addressed, once and for all.

Sincerely,

John Pepin

Government Interference in the Complex System of Economies

Monday, May 21st, 2012

Dear Friends,

It seems to me, when distributive justice by political favor is the policy of government, as it is the Obama administration, it increases interconnectedness, while at the same time decreasing the feedbacks of the complex system, that is an economy. The increase in interconnectedness is because, as government redistributes our wealth to those politically favored people and firms, we all become more dependent on government favors, and on the largess of government… we become more connected to government and society and less independent. The other side of the coin is that when government, as a policy, eschews the market system, the feed backs that are inherent in the market system are eliminated. People stop looking to their life experiences for information, such as, where we can invest, work, produce and live, and instead we turn to the government, who has taken over this fundamental aspect of market economics. Every time this has been tried it has led to oppression, starvation and collapse. Here I will show why.

Economies are complex systems. They are made up of individuals, who are interconnected through the economy, culture, society and government, we are diverse, we learn, and we respond to the cues of the market, society and our government give us. Adam Smith explained that, it is the “invisible hand” of the market that guides us to make self interested decisions, that improve the lot of Man, without consciously meaning to. This is a reference to complexity theory without actually knowing complexity theory. Economies are complex systems in every sense of the word.

When interconnectedness is tempered with strong feedbacks a complex system has less long tailed events. Long tailed events are outcomes that fall outside the normal bell curve of likelihoods that would be expected in non complex systems. People are between three feet and eight feet tall. If we plot the heights of all people, we get a bell curve, but if someone is born who is a Tom Thumb, ie. six inches tall, we have a long tailed event. Long tailed events in economics include crashes and bubbles. When government interferes with the feedback system we have more frequent long tailed events.

Another negative result is, tempered interconnectedness by government actions, makes people loose the ability to recognize high spots in the dancing landscape of economics. Markets loose their ability to meet the needs of the people by removing the people’s access to stimuli. As a result, people and firms often find themselves unable to adapt to new and changing circumstances… economies flounder, government gets bigger, and people become oppressed.

The way distributive justice through political favor lowers the natural feedback in an economy are many, varied and pernicious. This happens because the government seeks to raise the power of the Elite by negating, to the best of it’s ability, the negative consequences of bad behavior.

Lack of feedbacks create the environment where, people can act in ways that make no sense in the real world but can continue, for a time, through government interference. Like, for example, people can spend their entire lives on welfare… not being productive, people and corporations rent seek instead of providing products that meet human needs, babies are aborted, people can avoid saving for retirement, favored companies can be unprofitable for decades, without failing, due to government favor… among others.

We see the results in Greece, where government has destroyed the people’s ability, to behave as self interested actors rightly understood. When Greece is kicked out of the Euro zone and the Drachma is reprinted, it will certainly be the largest bill in the World… because it will need so many zeros on it.

Whenever governments in the past have stepped in and all but eliminated the natural feedback’s of the markets, we have seen oppression, due to government’s need for absolute power, to mitigate natural consequences, we have seen starvation due to the inability of people and firms to recognize and respond to human needs, moreover, we always see the eventual collapse of the economy, and inevitably the governments themselves. North Korea, Zimbabwe, Greece, Argentina, and Wiemar Germany are only a few examples of this phenomenon in action. This is the inevitable result of socialistic thinking. Distributive justice by political favor, due to the effect it has on the complex system of an economy, always minimizes the feedback’s that act as Adam Smith’s “invisible hand.”

The real question is, are the people of the World aware enough to stem the tide of redistributive justice, or will the whole World become Zimbabwe in a few years?

Sincerely,

John Pepin