Wednesday, June 24, 2009

Anatomy of Bubble and Bust in QM

Consider the housing market. In QM housing distribution is finite stage queue. The long period queue is the land acquisition and permit process. The medium is building the tract, the short are retail sales. When some change happens at the short end to stall demand, what happens.

In infinite dimensional space, we don't care. Each 'out of phase' process in the queue can smoothly adapt without over shoot after a shock.

QM is finite dimensional and twin constraints must be met.

When things are going smooth, inventory and inventory demand increasing; economies of scale are deepening. The market tends to reduce queue length, but it can only do this by dropping a term, deleting a queue in the finite set of terms.

At the market turn, the switch back to the deleted queue is painful bankruptcy across the network as supply movement stops. Inventory is zero bound.

In QM, the economy specifically drops terms whenever it feels safe, the economy always has a bias toward economies of scale. It is like an adaptive linear filter that successively reduces system variables as time goes on. Twin constraints, maximize measurement accuracy and minimize transactions.

Update:

This Scientiic American article of the same topic, I am reading now. But, the question is, how does a preference for economies of scale reflect neurology. It has been many years. My take right now is that this bias toward synchronous action is very old biologically. I have it back to the olfactory brain and primitive limbic system. The urge to action comes from the primitive olfactory. Evolution modified it with delay, and feedback from its neighbor. The feedback is that bias toward a certainty that others will make the same movement. From that we get flocking, herding, swarming. It is a necessary solution for evolution to move out of the pond.

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