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.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment