Sunday, November 25, 2007

Federal Reserve and Monetary Policy: Slash and Burn

It was disconcerting to hear an International Monetary Fund principle say that the new power brokers are hedge funds, private equity, national sovereign funds and central banks (The International Monetary Fund (IMF) Roundtable of Sovereign Asset and Reserve Managers in Washington, D.C. on November 15-16, 2007). I am not concern with hedge funds and private equity as long as they act on free market principles and they lose their capital if a wrong strategy was acted on. Having foreign powers deciding on policy is an invasion. Fortunately, for US of A’s citizens, Bush’s ineptness has made repelling this invasion easy. Bush’s lead in sending the world in a global economic depression has the effect of the strategic use of SLASH and BURN.

The Independent, Identical Distributed can no longer be applied, when one market embeds the value added chain from another, in stochastic economic models. Their marginal probability distributions are no longer the same. I wrote a business plan and got the “rookie” talk from my mentor. He said I would not get an investor if I undercut the revenue to gain business share. This is a business reality, which has to be applied to hiring descions. Example: If one uses “Risk & Reward” as the first ordent and number of hires as the second and assume it has a normal distribution. The convolution of a two normal distributions with a zero mean and variance var(1) and var(2) is a normal distubution with mean of zero and variance that is the sum of the two variances. The Free Market forces the firms to either make efficient use of inputs (competition among processes) or find the lowest cost of capital (the majority of the cost is labor).

IRS data show that the median tax filer’s income - half earn less than the median, half earn more - fell 2% between 2000 and 2005 when adjusted for inflation, to US$30,881. The IRS data shows the drop of wages and salaries indicated by the convolution of two independent, random variables whose generating functions are different.

A misquote attribute to Lincoln (Wikiquote): We may congratulate ourselves that this cruel war is nearing its end. It has cost a vast amount of treasure and blood... It has indeed been a trying hour for the Republic; but I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war. God grant that my suspicions may prove groundless.

There are those on Wall Street who think the job of the Federal Reserve is to lower short-term interest rates such that the Fed creates a market for their now illiquid assets.

The illegal alien crisis is now an economic struggle, a clash between race and a religious strife.

Bush’s housing debacle is getting worst. I predict we will elect the president based on the coming global economic depression and one who promises to get our troops out of the Middle East. If the religious right gets behind a candidate, I fear critical issues will not be addressed because the main theme will be focus on the “Separation of Church and State”. The US Supreme Court did not resolve this issue.

The Democrats are a bunch of spineless yellow bellies. The Nazis Party America (formally known as the Republicans) is a bunch of Fascist. Both parties are bought by multi-nationals. I will not back any candidate from the Christian Fundamentalist Party. The candidate I will like to see is Nader from the “I Told You So Party”. I do not think a candidate from the “Book of the Month Club” is viable.

One can not go wrong shorting the U$ dollar and buy those counties’ currencies that export raw materials. The Russians are buying Euros thereby propping up crude oil. The Federal Reserve has made this possible by “Printing” money for those, who gammed the system, can make a profit. Also, Bush is not doing his job. Bush’s “Faith Based Economic and Foreign Policies” are religious ideological myths (religion does poison everything). “With Proof, One does not need Faith“.

Viva La Revolucion!

Tuesday, October 23, 2007

Federal Reserve and Monetary Policy: If I had the money I would $hort the dollar.

I’ll use the following papers as references: Governor Frederic S. Mishkin
At the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, Canada
October 20, 2007
Headline versus Core Inflation in the Conduct of Monetary Policy
(a Taylor rule is given in foot note #2)
and
Discretion versus policy rules in practice John B. Taylor.

I’ll remind readers about Greenspan’s interest rates conundrum. The problem, my opinion, is in the output gap. The output gap is a measure between real GDP and trend real GDP. However, the US of A’s large trade deficit makes the output gap highly uncertain because economic conditions on “Main Street” are inhomogeneous. The Method of Moving Frames: See Wikipedia (for resource links) indicates that a component that is transformed has many elements.

Example: a producer uses a electronic component from another market. That component has a value added chain (topological lift) associated with it. Yes, using a component from the other market lowers the price and releases the resources used in the producers market however, those resources (mainly people) have to be addressed by an economic policy. Bush’s current economic policy (Oct 2007) is to let the market handle it. The market created a two tier labor (people) system. See my Neoclassical blog for details of group transformation and group convolution.

In other words, The FOMC should be using their discretion not policy rules.

There is another credit crunch coming. Sec of Treasury Paulson has made sure of this event. He said that there is a mortgage meltdown. I think it is going to come from the credit derivatives market. See OCC’s Quarterly Report on Bank Derivatives.

It’s the total risk-based capital that gives me the chills.
Total Risk-Based Capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholders’ equity, perpetual preferred shareholders’ equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a bank’s allowance for loan and lease losses.

I bet that subordinated debt has to be reprised.

It’s going to be a struggle between those who want to $hort the dollar and those who want to support the dollar in order to protect their dollar denominated a$$et$. There is no support for the dollar from the Bushies. If one assumes free market principles are executing their own strategies, with no collusion, then the time average price movements will indicate which side has the most money, leverage and guts. The general trend is dollar weakness.

Of course, the 1,000lbs Gorilla (China) can change all that. A possible scenario is China buying a financial institution (example; Bear Stern) from which it could support the dollar without having the Federal Reserve looking over its shoulder. The Security and Exchange Commission is much easier to deal with. Considering the fact China will be doing Bush’s job, the SEC will be very willing to bury all complaints in its procedural process.

Tuesday, October 02, 2007

I was listening to CNBC’s Closing Bell’s debate about Sovereign Funds. A Bear Stern’s senior manager’s opinion about a sub-prime meltdown and the whether China defends their currency was proven wrong. He indicated that the sub-prime will get worst if China defends their currency. National Sovereign Funds have become a issue due to their size and the fact that the Bush administration is inept, US Congress are a bunch of spineless, gutless YELLOW BELLIES, the (Anti)US Chamber of Commerce is still in its Nazification of America project [They labeled trail lawyers as a bad influence on American business and denounced Edwards. The problem for American businesses is the sub-prime meltdown and the credit crunch. I‘ll change my mind if the Chamber follow their “MO“. I want them to blame the financial sector and denounce Romney as a bad influence on American business and does not deserve to be President of the US of A. I don't think they will. So I guess all Demsocrats are traitors.] and Wall Street and Beltway insiders are hypocrites. If Uncle Sam had a surplus, Wall Street will what a big tax cut. If Uncle Sam makes an investment in a company, rivals will call that a government subsidy. If Uncle Sam makes an investment in a sector say, for example, spending a few billion more for children’s healthcare, Beltway insiders will call that Socialize Medicine. National Sovereign Funds have become a systemic financial risk in a free market economy.


One little fact is overlooked by those who think NSFs are just investments: their governments also control their respected monetary policy. We know Bernanke went to China. What we do not know is how much of an influence China’s central bank (and other NSF central banks) plays in the Federal Reserve’s decision making process.


From BankRate.com (updated 9/26/07)
What it means: FNMA is the Federal National Mortgage Association, commonly known as Fannie Mae. Fannie Mae is a corporation created by Congress to support the secondary mortgage market. It purchases Federal Home Administration, Veterans Affairs and conventional mortgages from primary lenders and sells them to investors. The index measures mortgage commitments (Mtg Com) for delivery (del) within 30 to 60 days; that is the required net yield on mortgage loans that lenders sell to FNMA, which in turn sells them to investors.
How it's used: It's an index that is used primarily by lenders that sell their loans to Fannie Mae. The lenders use it to price their loans. It has little direct impact on ordinary investors.

What it means: LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
How it's used: It's an index that is used to set the cost of various variable-rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Although it is increasingly used for consumer loans, it has traditionally been a reference figure for corporate financial transactions.


What it means: One year MTA. This index is an average of the monthly one-year Treasury adjusted to constant maturity for the past 12 months. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.
How it's used: It's an index that is used to set the cost of variable-rate loans, particularly adjustable-rate mortgages (ARMs). Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Since this index is an annual average of the monthly one-year CMT yield, it is less volatile than other indexes that are not smoothed out over such an extended period of time, such as the monthly one-year CMT.


What it means: One Year CMT. An index published by the Federal Reserve Board based on the monthly average yield of a range of Treasury securities, all adjusted to the equivalent of a one-year maturity. Yields on Treasury securities at constant maturity are determined by the U.S. Treasury from the daily yield curve. That is based on the closing market-bid yields on actively traded Treasury securities in the over-the-counter market.
How it's used: It's an index that is used to set the cost of variable-rate loans, particularly adjustable-rate mortgages (ARMs). Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Since this index is a monthly average of the one-year CMT yield, it is less volatile than daily interest rate movements but more volatile than other indexes such as the 11th District Cost of Funds.

Some Wall Streeters indicated the sub-prime rate was tied to LIBOR rather than US Treasuries. I made this table to see if some of Wall Street’s pundits opinion about the spread between Libor and US Treasuries will narrow if the Fed lowered Fed Fund target. If one looks at this historic graph (http://www.moneycafe.com/library/libor.htm) then I do not see how a slight drop in LIBOR can help the sub-prime market.


Rate Type Year Ago Last Month (Aug 07)Sept 07Diff (FNMA - LIBOR) Year AgoLast Month Sept
FNMA6.19 6.316.3
LIBOR 1 yr5.315.24.9.881.111.4
Diff (LIBOR-MTA or CMT) Year Ago
1 yr MTA 4.6644.9834.933.646.217-0.033
1 yr CMT (monthly)5.08 4.9834.933.23.27-0.033


If LIBOR needs to be around 1.5% to be a help in the sub-prime mess, then why did the Fed only cut 50 bases points? We know England’s 5th largest bank had a run. England’s central bank did its job but, why did the Fed cut Fed Fund target rate? Was it because a lot of NSFs uses LIBOR? If the Fed’s rate cut means higher food and energy cost, one can bet that US citizens will be screaming for the head of Bernanke (and the rest of the FOMC) on a silver platter.


Another question: “Will any rate cut help the housing market”? The answer is no. Two of the largest secondary mortgage companies (Fannie and Freddie) committed fraud. This fraud went on for years (98? (according to OFHEO's civil law suit) - 2005). Foreign investors buy those GSE’s bonds.


From Flow Matrix; 2006 1998

98 $301 billion

2007 $1,190.9 trillion


There are two problems with these GSE’s

  • They are too big. They can shut down the housing market.
  • There is a known connection between the GSE’s bond rate and US Treasuries.


Let’s take a look at the user cost of capital. From Housing and the Monetary Transmission Mechanism (all terms are defined in the paper)

Fraud invalidates the after tax real interest rates. This went on for years. The problem comes in the form of appreciation/depreciation of house prices. One house sold can affect the asset price. The user cost of capital is a time series equation. The user cost at t + 1 is effected by the interest rate a time t (along with house appreciation/depreciation). Years of fraudulent behavior suppresses the after tax real interest rates which in turn feeds the ever increasing price/decrease of the housing market.


Years of NSFs investment in both the GSEs and US Treasuries also supress after tax real interest rates.

Tuesday, September 04, 2007

Federal Reserve and Monetary Policy: ”I don’t see a rate cut.”

I was listening to CNBC”s Closing Bell (Sept 4 , 2007) and Ron Insana mentioned Frederic S. Mishkin’s paper Housing and the Monetary Transmission Mechanism would have never been published if the FOMC has not given their approval. He said that this was an indication the Federal Reserve was going to cut rates at its Sept 18, 2007 FOMC meeting. I read this paper and it gave me no indication that this was true. The problem I found with this paper is that it deals with a housing mechanism that did not exist at the time the housing bubble was 40% to 60% of GDP. In other words, the mechanism was based on fraud and its subsequence effect on lender/borrower behavior. The user cost of capital does not have a term relating to fraud.

A RECESSION is inevitable. The Global Investor has just concluded the US of A’s economy is based on Fraud, Debt and Bad Behavior. Bush’s economy policy was a lot of Smoke and a very Large Mirror. There is no mystery why housing prices are declining. All one has to do is to read; Income, Poverty and … for 2006 released Aug 28, 2007.
Real wages dropped by 1.1%. One should expect real household income to decrease in the 2007 report. All the definitions used are given as http links in the report.

Global investors have every right to question US of A’s future economic performance however, the remedy is NOT an immediate Fed Funds rate cut. As indicated in the above report, inflation is chewing away the US of A’s consumers’ purchasing power. Yes. I know this report is in the past however, it does show a valid cause and its effect. The Fed has to prove inflation and inflationary expectations will not to be elevated if a rate cut is enacted.

The Fed can wait because of the following observations/my opinions:
  • Commerce is still going on as indicated by freight movement, want ads are not empty and banks are still functioning.
  • Small Businesses are the backbone of the US of A’s economy and I know there are small business owners who still see money to be made as long as there is an investor willing to put up the dough (mainly banks).
  • Small businesses do not rely on the spread between US Treasuries and Commercial Paper.

One data point, such as the PCE Core Deflator less than 1.9, will give the required excuse for the Fed to act, if necessary. However, a rate cut is inflationary. The correct remedy is to encourage capital and labor together.

An interesting event should be noted: The Federal Reserve's ability to use monetary policy for its goal of full employment and price stability has been bypass by debt. In this case; household debt. The financial market has placed mortgages and mortgage back securities as “currency” on par with the US dollar. Unlike the US dollar, these mortgage type products only require that the buyer believed in its value, independent of the value of the US dollar relative to the foreign investors’ native currency. Return of investment capital can be manipulated by a government investment vehicles. Example: China’s sovereign investment funds.


This revelation such not come as a surprise, the Federal Reserve is an artificial construct within the US of A (all central banks are artificial constructs). My previous post indicated the raising and lower of indexes. Example of converting labor into capital is foreign direct investments. Example of converting capital into labor is World Trade Organization concept of economic migration.


The implication of the multi-linear function, used in my theory of global economics, requires gauge invariance. Isoquant analysis used in Neoclassical Theory is an applied economic model to the differential manifold and is therefore unworkable when it is used to explain cross border transactions.


The value added chain is still enforced however, people get mad when they do not feel they are getting ahead. Class mobility becomes a problem due to the fact Capitalism is a form of government. Potential of a person is not consider if that person becomes unemployed. Education is uneconomical in a Capitalist government. Monopolies become government sanction due to the person/group’s dependence of government protecting their interest. Innovation becomes stagnate because it is not in the best interest of the controlling monopolies to spend their monies on change. Capitalism has always destabilized a Democracy.


I’m very biased toward income inequality. I come at this problem from a mathematical point of view: A dynamic system moving around, what I hope, is an attractor/local stable point (say the US of A‘s market). One can also hope that this dynamic system is globally [asymptotically] stable.


A dynamic system is defined by the state space S and a map which is invariant in S (or any subspace of S). S has an arbitrary metric space.


I came across this: The Fed’s Real Reaction Function Monetary Policy, Inflation, Unemployment, Inequality—and Presidential Politics*
By James K. Galbraith Olivier Giovannoni Ann J. Russo August 2007

I agreed with this conclusion (PDF page 22):
Claim: Inequality is outside the scope of monetary policy. To the contrary, we find that pay or earnings inequality in manufacturing reacts to the term structure, and therefore, partly to the rate-setting decisions of the Federal Reserve. Historically, recessions are prefigured by inverted yield curves; rises in both unemployment and inequality result. Inequality has always been the “recipient of shocks,” among them the effects of unemployment and inflation. But we show here that inequality is also a direct product of monetary policy choices. It is not “outside the scope” of the issues with which the Federal Reserve must deal.

Tuesday, August 28, 2007

Federal Reserve and Monetary Policy: “A Watched Pot Never Boils”

I want to begin this entry by proving the existence of elasticity of labor with respect to capital. In previous entries I proved the existence of the “value added chain” as a topological lift between K(capital) vector(co-vector) space and L(labor) co-vector(vector) space. The K-L spaces are linear which implies there exists a Cartesian product of this multi-linear space:



This is a handy tensor because one can raise and lower indexes by the use of the metric tensor and a contraction (convert capital into labor and visa versa).

I’m going to use scalars to show the concept of the time evolution of the arc elasticity of labor with respect to capital (% change of labor with respect to the % change of capital).




The time evolution is the direct product of the arc elasticity of labor with respect to capital and the arc elasticity of time (its inverse; which implies none of the matrixes are singular).


It is realistic to simplify this time evolution to a set of average times. As time evolves in steps those shocks, that have a short period, affect the evolution before those with longer periods. In other words, the time evolution is a superposition of average periods.

Wednesday, August 01, 2007

Federal Reserve and Monetary Policy: “Money Follows Money”

This entry is a continuation of the “Heard Mentality”. One hopes investment strategies have been diversified in this global financial environment. It is conceivable a group of investors hold the same asset for the same or different strategies. In this case, asset price is limited by supply and demand. However, it is possible investors from different markets have different values relative to their investment strategy which become crucial when that asset has collapsed in price. Relative values decouple one asset from another in the form of a negative correlation.

Time evolution of an economy is model by the time evolution of Elasticity space (See my blog Neoclassical Theory… ). Financial companies have a way which makes them money. See Applied Mathematical Finance for quick info and other resources. Another analytical tool can be use, as exemplified by the infinite horizon Markov control process. The upshot of this line of thought: Risk and Reward are topological spaces.

A parameterize, continuous function of the form h(t, 0) = f(t), h(t, 1) = g(t) and h(0, t) = x(0) = h(1, t) where h[0, 1]. I will keep this simple and assume there is a fundamental group. If one attaches time to the parameter t, then the functions describes “products” of value with a velocity.Defining the interaction between those who need protection and those who are willing to take it as a transfer of value, implies the existence of at least one on each side of the trade (from the stand point of Homotopy there exist a self interaction which, by my definition, transfer no value).

PROOF:
f1, g1 : X -> Y are homotopic, and f2, g2 : Y -> Z are homotopic. Their composition f2 o f1 and g2 o g1 : X -Z are also homotopic. My working principle is to let X -> Y represent the transfer of value due to one side of the trade and Y -> Z represents the transfer of value due to the other side to produce the final product. Z represents the final output space for this example. Two different processes are represented by f’s and g’s (no self interaction). It is require that the “length” of the path in Z not be zero (no transfer of value with self interaction) and its length be the same for f‘s and g‘s. From an economic point of view the value of a product can be consider a constant for the period in question. End Points are fixed in Homotopy.

Let (S, L, u) be any measure space, let (S’, L’) be a measure space, let T:S -> S’ be a measure function and let

be the image measure of u under T. If w: S’ -> R is a measure function and either w is nonnegative or

is finite, then




where the first integral is over S’ and the second is over S. The idea here is that u will be some measure one is used to working with, such as Lebesgue measure, and u composite with the inverse of T is more complex.

Elasticity space is a compact Lie group which makes the Risk and Reward space a compact Lie group. The coordinate transformation is an equivalence relationship.

In general, if expectations are not meet, consumers‘, firms’ and governments’ expectations are also not meet. A “Restoring Force” develops such that Risk and Rewards are rebalanced.

Wednesday, May 16, 2007

Federal Reserve and Monetary Policy: State of the Union(?)

Face the facts people: Washington DC is a cesspool. It stinks now. It will get worse in the summer. Nothing will get done. No trade, immigration and no healthcare policies. I would like to see the mauling this Dem leadership is going to get when they try to push their so called compromise trade policy on “rank and file” Dems. Immigration and healthcare will go nowhere unless the Dems and the Republicans can put up a couple hundred billion $dollars upfront. No way will the rich allow their money to be redistributed. I don’t expect the minimum wage will get out of committee due to the tax breaks the Senate inserted. I’m sure the House can reject the Senate’s bill on procedure due to the fact the House is in charge of the US of A’s purse strings.

Bush’s psychological warfare against the citizens of the US of A has damage the collective psyche. We are fragmented. Nothing will get done until government is fixed. The sub-prime implosion has forced people to look inward, toward their local communities’ status. Bush’s meddling in the housing market has back fired. The US of A is experiencing a decline in national wealth. This decline is disproportional distributive, everybody below the rich are getting poorer while the rich are gorging themselves on backs of the middle class. People are waiting for Bush’s impeachment process. Congress has a choice of fixing the Federal Government NOW or the people will. In other words, Congress will have to address the decline in national wealth or people would flood the courts with civil law suits. Fat chance on tort reform.

The general state of the US economy can be state by the following three observations.


  • Bush is robbing Peter to pay Paul and telling Peter he can not complaint because the Terrorist will win. This is best illustrated by Federal funding in the Katrina/Rita rebuilding while the auto industry is going through a contraction.


  • Bush is robbing Young Judy to pay Old Mary and even though Young Judy thinks this is a Ponzi Scheme (an operation intended to defraud investors in which no new wealth is produced and creditors are paid off by borrowing ever larger amounts from new investors.) Examples; Private Equity are not White Knights. They rip out the guts of the target to reduce cost, drain cash to pay themselves and saddle the company with heavy debt. Pensions do get a leaner company if they are stake-holders in private equity or private equity over pays for the target (its good for Old Mary) BUT, workers lose their jobs (Young Judy). Oil Execs are now using this tricky phrase: “Pensions are large stockholders (Old Mary)….” Young Judy’s has to dough out a larger portion of her shrinking wage to get to work (Young Judy has a 2 hour drive from the only area she can afford to live and public transport in this country is a joke).


  • The Communist government of China is not following free-market principles. This action has placed a floor in raw materials and commodities. Those companies that sell and ship these out of the US will be working (the liquidly buffer against the housing down turn). However, the spineless central bankers at the Bank of Japan, bowing to their exporters, have destabilized the $dollar. A few thousand jobs come at a price for society as a whole; $Dollar induced inflation which will force the Fed to increase short term interest rates.


In general, the US of A has a huge trade deficit. Anything that is paid for by the federal government will have a LOWER effect on society’s output due to the borrowing of foreign monies. Example: Agriculture is subsidized by the federal government (Surprise!! Surprise!!! This also leads to $dollar induced inflation). The US of A is no longer a net exporter. The weak $dollar, relative to other major currencies, is no longer as effective as in the past when the US of A had a strong export position. Again, only a few thousand jobs come at a price for society as a whole. I do not see the value added chain to exporting scrape metal. You get the full effect of the weak $dollar if the US of A turns the scrape metal into a final product (a much larger value added chain).


Response to first comment:
The mechanism for $Dollar induced inflation/deflation is reflective in $dollar denominated commodities. Example: 60% of our oil is imported. The US is dependent on a long logistic chain for goods. This chain has become energy intensive.


Globalization has changed labor migration. WTO thinks labor migration is key to global growth. This a valid idea if the destination country has a positive (surplus) output. The US of A has a negative output (as reflective in its current account deficit). The US work force now has a $dollar denominated value relative to other countries’ work force. One can check this by looking at job postings at your favorite job search site. Count how many posts are offering relocation pay.


An example of migrant labor force, in the US of A, can be illustrated with the signing of NAFTA. Certain construction firms took liberties as to the meaning of commodities and hired illegal aliens, mainly from Mexico. This practice was evident after Katrina/Rita by remarks Mexico’s Fox made as to the Mexicans’ contribution to the rebuilding. US firms are not treating their labor needs as in the past (this is a behavior change). Decades ago firms would have placed adds in other cities and use wages, benefits and relocation pay as a means to attract labor. If firms has determined another source is available, they will use it. Even if it means “flying a jet to another country to have it maintenance”.


It is conceivable the US of A will see a forced labor migration as in the past. Labor force migration during the depression and collapse of the steel industry (Rust Belt) are common examples. Labor will move from the auto producing states to southern Cal. (most probable due to their capital markets are still functioning) and the Gulf States (due to tens of billions of $dollars being spent on the rebuilding that will take years to accomplish and oil production). Investments have become a big problem for the US of A. Money is being attracted by private equity, hedge funds and over seas investments. Cutting taxes on capital can not over come the crucial fact that US labor is very expensive relative to developing countries such as India and China.


Another effect of globalization is reflective in the labors’ task in the US of A manufacturing process. The US work force has become final assembly. I admit this is to due to businesses having to cut a deal in other countries, but the truncated value added chain must be augmented by another process or processes to balance trade (input = output or imports = exports with respect to value added chain[s]). More input means that the value of labor has less value which is inflation unless prices are similarly reduced (preservation of purchasing power).


Note: I did not use the Federal Note. Everything is now relative in a global economy. Even within ones' country.


In general, the amount of gold, in a country’s currency, is no longer relevant in a global economy that has jettisoned the gold standard. Gold’s price increase/decrease which in turn should make the gold in the US $dollar more/less valuable, with respect to other countries’ currencies, due to the fact that gold is priced in US $dollar, no longer controls the relative price of the US $dollar. Capital and Labor are isomorphic, in topologic terms, which means that the balance of the value added chain has become the determining factor relating the relative price of countries’ currencies (if they are allowed to float). See previous post Federal Reserve and Monetary Policy: Is a Windmill Labor or Capital? for deails of the value added chain.


A Side Note: One wonders why countries hold on to gold. They do not use it in a production process, like in industry, art and in coin pressing (countries can stop making gold coins). Counties have become “Gold Cartels”.

Monday, May 07, 2007

Federal Reserve and Monetary Policy: Asset Bubbles

My previous post showed that capital and labor are isomorphic. I will use this post to explain the fundamental bases of one of Wall Street’s famous quotes: “The trend is your friend”. In other words, what is the mathematical foundation of Walls Street’s (cattle) heard mentality.

One of the fundamental variables of the topological form of Neoclassical Theory is information. (one may call it a standard model for economics or one may refer to it as a dynamic field theory [this reference can give some theoretical physicists a heart attack as they try to defend Lie’s Derivate and Differential definitions of objects not deforming under Local and Global Symmetry Transformations.])

Information has a value; Galileo was the first scientist to use telescopes for the study of astronomy. The story is told that Galileo was made aware of a new device apparently from Amsterdam invented by an optician, which allowed objects at a distance to be viewed more easily. Galileo took the idea of the telescope and began to make technological improvements on it. He soon had a device that he could market to politicians and to the merchants of Venice. They were able to see faraway ships at sea approaching the land. Some of these ships could have been enemies; telescopes provided advance warning of attack. Other ships were carrying goods for trade. With the help of the telescope, merchants could manipulate the price of commodities and make larger profits off each shipload of goods. The merchants were grateful enough to Galileo that they set him up with a good income and a university chair. Galileo used his telescope to make many new discoveries about the solar system. He discovered craters on the moon, phases of Venus, the moons of Jupiter, and sunspots. He used his discoveries to support Copernicus's heliocentric model of the universe.

Information can be capital, such as a database or it can be labor, again one can use the database as an example of a firm selling the information (database doing the labor transforming information into money) as the firm spends capital keeping it updated.

Taxes are, in fact, information based. No goods or services are transferred, but a value was transfer.

The other fundamental variables I could think of are transportation, energy and time. I do not believe land is a fundamental variable. One is welcome to reject one or all of these variables.

NOTE: If one is interested in BLACK-BOX trading, one just needs to define their vector space such that the following axioms are followed.

Let V be a set and F a field. V is a vector space if it satisfies the following rules:
(a) There exists a binary operation in V called addition and denoted by + such that
1) (u+v)+w=u+(v+w) for all u,v,w in V .
(2) u+v=v+u for all u,v in V .
(3) There exists an element 0 in V such that u+0=u for all u in V .
(4) For every u in V there exists an element -u in V .such that u+(-u) =0.
(b) There exists an operation called scalar multiplication in which every scalar λ in F
can be combined with every element u in V to give an element λu in V such that
(1) λ (μu) = (λμ)u
(2) (λ+μ)u=λu+μu
(3) λ(u+v)=λu+λv
(4) 1u=u
for all λ ,μ in F and all u,v in V .

Economic Elasticity space is a Lie Group (see my Neoclassical Theory post). One can determine what its dynamic properties are under time evolution. The time evolution of the underlying tangent space is the velocity of goods and services. The time evolution of the elasticity space gives the acceleration. Market forces are how the i,j’th component of the elasticity space evolve over time with respect to the k,l’th component. If one is not interested in black-box trading then one can find a general solution that fits the aggregate. An example can be a pseudo-wave. A pseudo-wave can be illustrates by drivers on a freeway rubber necking an accident. The resulting back up is a pseudo-wave. The time evolution of a market’s pseudo-wave is the momentum of that market. See my post Neoclassical Theory for the math details on how one can use a Dirac Comb to find the wave nature of a market.

One can solve the forces acting on the market by implicit representation; accelerations that are prohibit or parametric representation; accelerations that are allowed. One can approach this problem from a gas, hydraulic or thermodynamic point of view.

In a global environment, information must come from all markets. Wrong information can lead a free-market astray. The US of A’s housing Bubble is an asset bubble based on the wrong information. In fact, the housing bubble is due to fraud by the GSEs Fannie and Freddie Mac (under White House control), fraud in the mortgage originator markets (ex: New Century Financial), bad lending practices in all of mortgage financial markets and conflict of interest due to mortgage companies are also home equity lenders. It is hard for financial institutes and individuals to analysis risk when the White House commits fraud and tells all that Regan proved deficits do not matter. It is also hard to maintain a stable monetary policy when the White House trys to switch the US of A’s economy from an output base to land, that produces no output, standard.

China has a Communist government and a command economy. I wouldn’t trust China as far as I could spit. The bull-headiness of people who think China is acting for our good is also wrong information. The White House has made risk analysis a mute point. See Remarks by Vice Chairman Donald L. Kohn At the Conference on Credit Risk and Credit Derivatives, Washington, D.C. March 22, 2007 Asset-Pricing Puzzles, Credit Risk, and Credit Derivatives

In a two tier economy such as the US, preservation of purchasing power is the upmost importance. See Remarks by Governor Frederic S. Mishkin At Bridgewater College, Bridgewater, VirginiaApril 10, 2007 Monetary Policy and the Dual Mandate Food and energy prices are key to US of A’s social stability. The information of the housing market is in the global markets. The Federal Reserve needs to put to rest the notion that they are comfortable with the rate of inflation. PCE deflator is not important when one’s financial markets are owned by foreign governments. It is upsetting when a major financial firm’s senior manager states that he will be worried about the sub-prime market if China defends its currency.

There is enough liquity in the global markets to buffer against the liquidity drain due to the US of A’s housing implosion. The Federal Reserve loses crediablity if they do not act on inflation. I do not believe PCE deflator will fall below 2%, too much money chasing too few assets (hard and/or soft). It is better to put Greenspan’s “exclamation point “ on Fed Funds when GDP is close to trend rather than being forced to do it when GDP is less than or equal to zero.

In general, asset bubbles affect the market due to their asynchronous transport nature between storage/savings and the production process
(asynchronous transport theory). Production, Storage/Savings and Consumption are marginal (probability) processes (as oppose to conditional probability). Assets do go through the Capital/Labor process. Example: stocks provide the labor and the holder provides the capital. Stocks are held until the cost of opportunity signals a change. However assets, not used in the production process, signal a supply shortage (effective supply = actual used in the process - future supply). Proof of this information is acquired over time, which would lead to a correction. Isomorphism between production and consumption requires that effective demand = actual consumption + future.

Saturday, March 17, 2007

Federal Reserve and Monetary Policy: Is a Windmill Labor or Capital?

If one defines the transfer of value as parameterize, continuous function then one is able to answer this question. See my blog: Neoclassical Theory… for math details. Homotopy (see Wikipedia: Homotopy) shows that an isomorphism (equivalent classes) exists between producers, consumers and government. Producers take input(s) and produce a product. Producers are, therefore, a composite function of various inputs due to the transfer of value associated with those inputs. The “process” itself is a transfer of value mechanism. From the standpoint of Homotopy, labor is isomorphic to capital.

A parameterize, continuous function of the form h(t, 0) = f(t), h(t, 1) = g(t) and h(0, t) = x(0) = h(1, t) where h[0, 1]. I will keep this simple and assume there is a fundamental group. If one attaches time to the parameter t, then the functions describes “products” of value with a velocity.

Defining the interaction between producers and consumers, as a transfer of value, implies the existence of at least one producer and one consumer (from the stand point of Homotopy there exist a self interaction which, by my definition, transfer no value). My definition also implies the existence of at least one unit of labor and one unit of capital.


PROOF:

  • f1, g1 : X -> Y are homotopic, and f2, g2 : Y -> Z are homotopic. Their composition f2 o f1 and g2 o g1 : X -Z are also homotopic. My working principle is to let X -> Y represent the transfer of value due to labor and Y -> Z represents the transfer of value due to capital to produce the final product. Z represents the final output space for this example. Two different processes are represented by f’s and g’s (no self interaction). It is require that the “length” of the path in Z not be zero (no transfer of value with self interaction) and its length be the same for f‘s and g‘s. From an economic point of view the value of a product can be consider a constant for the period in question. End Points are fixed in Homotopy.


I define the process as an interaction between capital and labor as a sanity preserving mechanism.

We can use the composition mechanism for production to analysis the effects of Home Equity Credit Lines on a local economy. I’m going to take a stance and state the House is the Laborer and the Homeowner is the Capital. Equity -> Cash is the process the House does and capital (the homeowner) is needed to pay off the loan. The Homeowner needs a value such that payment is made and the house is in their procession, acquiring equity (replacement cost for the equity build). In order to remain in business, from a firm point of view, inputs must be used efficiently (productivity gain) and the capital must come at the lowest price. The output of this firm must have a value such that it can be sold to the community. If your house was a fractional bank or the cash was used in some other firm or you have a home based business, your community will experience economic growth.

Reality check

  • The Federal Reserve will never allow housing to become a fractional banking system.
  • Vast majority of home owners do not have a home based business.
  • The Equity -> Cash process, for the vast majority of home owners, is a lost.
  • Local communities can fall into a poverty trap if none of cash was used to create new jobs.