Federal Reserve and Monetary Policy: The Institutionalizing of Fraud by Don Bush

I will not go into the manifold’s atlas. See Manifold at Wikipedia. The inputs to Neoclassical Theory of Production’s output y = f(x1, …, xn) are the result of labor interacting with capital. Neoclassical Theory of Production boils down to Isoquant Analysis of capital and labor. There is a relationship between capital and labor. Marginal Rate of Technical Substitution is an example. In relation to the economic manifold’s atlas, capital and labor are coverings. “Y elasticity of x”;



is really an inner product of a Jacobian matrix with a
quotient of two groups, K and L. (See Groupoid at Wikpedia)



A good starting point, from an economist point of view, is to describe the “value added chain”. Picking up a rock and painting a face and body is an example of a value added chain. Capital (rock and painting supplies), are combined by Labor (you), to produce My Pet Rock. One can describe the process as the following:
Labor (you), pick up Capital (rock).
Labor (you), wash Capital (rock).
Labor (you), paint Capital (rock).
Labor (you), use Capital (transport), My Pet Rock to market.

The above process is really hard to put into math terms. If one stares at the above process long enough one can get the illusion that some sort of pattern emerges. Labor (you), saw fit to pick a rock. Time is money, so Labor (you), added value. Capital (rock), had that shape that was of value. Value was added to the Capital (rock). Value is the common element. There is a branch of math called Category Theory which can help to place an order to the My Pet Rock process. I will not go deep into Category Theory (use your favorite search engine) (See figure 1’s).

• A category consists of a class of objects. Can be anything like A, B, etc…



• A class of morphisms designated by anything like f, g, h, etc… usually represented by arrows.



• Each morphism has an object as its domain and an object as its co-domain. Example f: A->B where A is the domain object of morphism f and B is the co-domain object. (fig 1a)



• Each object, example A, has an identity morphism which has the domain A and co-domain A. (IDa fig 1b)



• Each pair of morphisms, example f: A->B and g: B->C is a composite morphism g o f: A->C. The co-domain object of morphism f is the domain object of morphism g. Start from the right (f) and go left (g). (fig 1c)

A category has these rules:

• Each morphism f: A->B has identity composites (f o IDa = f) and (IDb o f = f)



• Each set of morphisms f: A->B, g: B->C and h: C->D is Associativity. (h o g) o f = h o (g o f) (fig 1d)

A simple example see fig 1e.

Check for Composition: f o h = IDb, f o g = IDb, h o f = IDa, g o f = Ida =>> OK
Check for Associativity: (h o f) o g = IDa o g = g
h o (f o g) = h o IDb = h hence h = g =>>> not OK

A good object domain for My Pet Rock process for labor’s transfer of value morphism is “labor” and the co-domain object is “labor-value”. The object domain for capital’s transfer of value morphism is “capital” and the co-domain object is “capital-value”. The perspective that “labor-value” object is a “capital” object and the reverse, “capital-value” object is a labor object is not a problem in Category Theory. Rock’s “labor” was in the form of catching your eye and you became the capital. My Pet Rock process is a composite morphism.

g:C->L and z:L->C are morphisms such that z o g = IDc and g o z = IDl
Some notes:

• f o g = h o g does not imply g = h. It can be in some categories.



• There is only one ID morphism. A category having two morphisms starting and terminating from the same object indicates a “conversion”. Example: converting Fahrenheit to Celsius and the reverse conversion.
  

One can now translate the above My Pet Rock category into math using topology. We can think of the conversion of Labor into “labor-value” as a process that takes place in a time interval t. We have a family of morphisms f(L) (or f(C)) that takes the set Labor (or Capital) into the set “labor-value” (or “capital-value) within a time interval [0, 1]. I insist the topology conform to My Pet Rock category. This requirement means the topology space is simply connected. Making change or having the same number of laborers at equal cost are examples of a economic model being simply connected. It can be shown My Pet Rock is path connected and has a Trivial Fundamental Group. My Pet Rock process conforms to a Lie group. One can pick a representation of the Lie group. (See An Elementary Introduction to Groups and Representations as an example)

Output is a real number. I would like to pick GL(n, R). General Linear Group over R is a group of n x n invertible matrices with real entries. However, GL(n, R) is not a simply connected Lie Group. There is an out from the dilemma. GL(n, R) can be decomposed into its irreducible representation U(n). U (unitary) is a group of n x n matrix with complex entries whose column vectors are orthonormal. SU(n) is a unitary group whose determinant is one. SU(n) is a simply connected Lie Group.

SU(n) --> “real world” --> GL(n, R) process is a general scheme that helps economist analyze Neoclassical Theory. Economist believes there are NO infinities in Neoclassical Theory. This belief is born out of the real world. This belief is wrong. My Pet Rock category can have infinities. The infinities are the result of fraud.

Debt, Options, Futures, the Financial Bubble and Fraud

I can change My Pet Rock category into Bush's Crushing Debt category by changing the object “capital-value” into the object “debt-value”. Society is using FICO scores. Some firms are using FICO scores for their hiring decision. People change their behavior during times of economic stress. They borrow more in hopes they can pay off that debt when times are better. They become their own boss. Etc… Society hopes anyone can be their own boss, but Don Bush has changed that. One needs a prefect credit history, come from a rich family or knows someone who is rich. The capital markets have fled toward richer lands. FICO scores have now become a poverty trap policy.

I insist Don Bush’s policies conform to the Bush's Crushing Debt category. Don Bush’s policies extenuated the Financial Bubble. The Financial Bubble is a set pf accounting, regulation and policies that are outside the normal Neoclassical Theory, yet they interact. Don Bush’s meddling in the housing market through his proxy Fannie Mae and Freddie Mac is an example of the Financial Bubble affecting real economic growth.

I pick SL(n, C). Special Linear Group over C is a group of n x n invertible matrices with complex entries with a determinant of one. SL(n, C) is a simply connected Lie Group.

Here’s a good question: If Bernanke believes inflationary expectations are contained then why the financial bubble? See Chairman Ben S. Bernanke
At the Federal Reserve Bank of Boston’s 53rd Annual Economic Conference, Chatham, Massachusetts
June 9, 2008
Outstanding Issues in the Analysis of Inflation

Bernanke believes some inflation is needed for economic growth, yet the financial bubble has exceeded the needs of “US of A’s Real Economy”. What are the financial bubble’s inflationary expectations? I say the anchor is the $50+ trillion unfunded liabilities. Economist can use SL(n, C) as their math tool.

Viva La Revolucion!

Federal Reserve and Monetary Policy: Farmers’ Market

The subject matter can also be described as “If I had the money, I would short the $dollar: part two”. Ben Bernanke and the rest of the Federal Reserve, has stepped into doo doo. The Federal Reserve has just trashed their reputation. I WILL NOT BE SURPRISE IF OBAMA LOOKS FOR A COMPLETE HEAD REPLACEMENT OF THE FEDERAL RESEREVE. Bernanke and the rest of the FOMC will once again be educated in what it means to be a free market.

A half of trillion $dollar US government debt is probably an under estimate. I will not be surprised if the debt ceil would have to be raise to accommodate three quarters of a trillion $dollar debt. Inflation is here due to fears the US of A’s current account deficit. Import inflation due to a weak $dollar. Monetary inflation is being transformed into poison in our food, toxic toys and, in general, products from China that are “Unsafe at Any Speed”. The US of A’s citizens will have to endure the “death of a thousand swords” due to subsidies (even our own) that will not allow demand destruction and/or increase in supplies.

The two base reasons for my negative opinion:

1. The Federal Reserves job is to affect the elasticity of the $dollar.
   
2. Bernanke and the rest of the Federal Reserve have not address the structural impediments with respect toward household debt.

The Federal Reserve’s working assumption, which is rational expectations of the finanical markets and, in general, people has been proven wrong. A “military” strategist can use their weakness to make a contrary move and make a lot of money.

Any move, made by the US government to support the $dollar, is akin to a person yelling FIRE in a packed theater.

The likely candidates would be:

• Region banks are weaker due to a lot of debt whose basic theory is under fire. The structural problem is this debt was made while household debt was influence, either directly or indirectly, by fraud.
  
• Investment banks will see a run, aka Bear Stern.

The best strategy with respect to the above would be to short or buy puts.

Gold and silver is a good buy.
Grains, cows and other food stuff are also a good buy.
I wish I own an oil field.

The best candidates for the new Federal Reserve would those who recognized the world is not a rational one. Government policies clash and this clash must be taken into account when setting monetary policy.
The $dollar will crash if the Federal Reserve lowers Fed’s Target without a new US government policy. This policy must acknowledge the decline in US citizens’ decline in income. It must also address Wall Street’s attempt to shift their risk unto the US citizens. This shift can be characterized by the following:

• Financials want to buy mono-lines so they can maintain the fantasy that their junk debt is investment grade. Manipulation of their write downs.
• Financials want the government to change the timing of write downs. Manipulation of their accounting.
• Financials want the government to guarantee a minimum return via the FHA. Manipulation of risk. Its going to take years to recover from their screw-up and this plan would put the whole banking system under risk. There is already a fight for the shrinking resources of the US government and the US tax payers will be paying for the loss.
• Financials want the Federal Reserve to buy their junk debt. Hide their screw-ups in the government.

Any attempt by the Federal Reserve to indicate that “debt does not matter” without a change in the federal bankruptcy laws and some sort plan to boost the prospect for wage inflation (that’s right, wage inflation) will be deemed as wrong. Greenspan did not create this mess however; Bernanke will be responsible from this moment in time.

Local communities might want to create a design for local script. The $dollar is going to be worthless.

I’m working on the math to show why rational expectation is not a good working assumption. I will be posting a major section in my Neoclassic… blog tentatively named “Process Driven Economics” in which I will show Neoclassic theory has a parallel transport and field theory. Field and parallel transport theories are prerequisites toward the gauge theory of Neoclassical Theory of Production.

Viva La Revolucion!