Thursday, September 17, 2009

Money, prices, correlation and constrained goods

The money industry in our simple mutli-stage queue model operates like a distribution queue for paper contracts, debt. In equilibrium, money meets that same sampling constraints and form the banker's yield curve. Because of the drive toward constant inventory measurement uncertainty, the bankers yield curve is finite dimensi0oned with a specific rank. All goods, including money, try to achieve the same rank, or length, in the supply chain.

Money will adjust the lot size and trading frequency to meet the rank of all other goods. The five year goods inventory trades five year bonds, etc. The farther back in the queue of money, the large the unit of debt and the less often it is traded. We get the standard bankers queue.

Money debt wants to match the variance of queue size to the average of all other goods at the specific term. A good price is proportional the square root of variance/(mean squared) at each term. When the price is rising, interest rates rise.

A highly constrained good will try and deflate the distribution queue, shorten the supply chain. If other goods queues do not follow suit, then there is term overlap Deflated term points will overlap term points of other goods and money balances across queue boundaries become correlated.

Money, which is really paper contracts estimating future deliveries, became efficient with the literary revolution of 1750, and since then money has been the fastest adapter and least constrained good. Most inflation results from sudden, relative constraints in some essential goods. Little of it, in modern times, comes from monetary constraints.

So, in this formulation, Say's law is correct in equilibrium, and equilibrium adjustments are aburpt because of the low dimensionality of the economy.

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