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.