Sunday, November 21, 2010

How far out in the future do we look?

Well the market looks 30 years out according to the yield curve, because the 30 year bond is the longest effective term we use. But inside the firm or household planning could be going out to 40 or 50 years, but the quantization effects mean this internal 50 year accounting is bundled in the revealed 30 year inventory cycle.

The concept is important when reading this post by Brad. How do we apportion the cost of climate change across individuals today and tomorrow? We see the first problem right away, the individuals affinity for the future is revealed only for 30 years. The scientist and policy maker are looking 60 years out, and dealing with an economy that is not quite as accurate.

Mathematically, the dilemma is this. Any long term equilibrium occurs because of one or more fluid markets. The definition of long term stability is liquidity in a sample space. To see farther out in time, one has to sample faster in the present. If the economy is to 'see' the long term equilibrium of climate change, then the present must have fluid market that provide accurate samples. Policy enforcement beyond the 30 year view will be inefficient in the short term because it removes liquidity and shortens the future outlook.

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