## Monday, January 31, 2011

### My current version of the yield curve equation

Usual conventions:
Sigma_i is variance, and  Nu _i is sample rate of component i.  Beta total bandwidth, where the curve meets the short end. Gamma is inherent efficiency, which I set to  log(2).
My equation tells me that bankers measure their own variance along the yield curve with a finite set of samplers. In equilibrium, at minimum redundancy, that is all that bankers do. When bankers are off equilibrium, then their sample rate and sample quant cause small inversion in the curve. They make little expansions and contractions of curve space to get back into sync.  When space is crowded, they merge space and reduce rank.  When space is sparse, the increase rank.

The main mechanism of change is bandwidth gets shorter as consumers contract, that causes an adjustment across the bankers network.
How did I derive log(vi) for the numerator?
I set the information content in bits equal to the signal power.
We look at variance over the curve.

### California Pension reform?

John Diaz at SF Gate sees some pension reform ideas coming in California. HT Pension Pulse

I think we get a much better restructuring by going belly up, then splitting the state into multiple states. This problem consists of the Washington DC suck machine eating California tax dollars. We need to minimize the larger states, and a California bankruptcy gets us there with efficiency.

### When nations and bondholders see a better future

Yesterday, House Speaker John Boehner (R-OH) disavowed default on Treasury debt. On Fox News Sunday, he said, "That [default] would be a financial disaster not only for our country, but for the worldwide economy. Remember, the American people on Election Day said we want to cut spending and we want to create jobs. You can't create jobs if you default on the federal debt." Sometime in May or June, I expect enough spending will have been cut to enact a debt limit increase. Peter Davis reporting
Not quite true, the default happens because after the last stages of contraction as this research shows.

These economists looked at the quarterly data for defaulting nations, and found the proper sequence of events:  1) The nations is near  bottom,  2) growth starts, then 3) default occurs, in that order. Nations enter contractions when they discover their blunders from the past. Upon discovery, they naturally reject the past and move on, and that means default.

Default is a two way street, former bond holders and the nation discover a better path forward, and future gains appear to overcome the costs of current default.

### Quantization and rank

Playing around with the the yield curve, we ask, what happen when the economy drops the 'stages of production', the rank.  Quantization error goes up.  Here I use term values chosen from a Fibonacci sequence and find that the accuracy increases as we increase rank.

The economy has dropped rank once, and is likely to drop again, so as we get simpler we get less accurate.  But there is another curve called gains from specialization which decrease as we increase rank. The two are in conflict, we balance precision and risk.

This method uses Shannon (Channel) Theory, looking at sparse sampling compared to perfect sampling.. The Levine paper constructs the balancing equations from scratch.

What is my assumption?  I want the quantization error from each banker along the curve, under the assumption that he has the optimum share of the curve, and is not sharing more than a Gibbs amount of bandwidth with the bankers upstream and down stream.
So, the entropy iseparated as:  Pi* log(Pi), where Pi is the probability of a sample, 1/term, of the banker, his sample rate.
So from Shannon:  C = B log(1+SNR) can be taken for each banker, I have broken up the channel into components of number equal to rank.

My assumptions have no other risk only quantization error and the total SNR is the mean SNR from each banker, so quantization error become 1/(SNR) for each banker.  In the limit, as the number of bankers along the curve grows, the quantization error goes to zero.  Later I will introduce risk as a measure of the over crowding along the yield curve.  There will be a trade off, fewer bankers along the curve yield more quantization error, but less risk of overlap among bankers. Look at the two yield curves presented below.  One has three terms, and one has seven.
Do bankers split the transaction rates along the curve by Fibonacci? It looks that way, and likely true if bankers are always searching for equilibrium between two ranks taking the shortest number of steps.These yield curves do the same function as bankers, they measure their own error.

## Sunday, January 30, 2011

### Think Progress on the Debt Limit

They are commenting on our choices, more debt or live with higher risk of default.  The post by Pat Garofalo misses part of the equation, more debt also raises the risk of credit down grade and a downturn. At this point we obviously have a crowding out problem as government spending drives up imports and causes the private sector to contract.  It is a constrained resource problem, the Fed cannot print oil and other inputs.

Right now the central government default depends  upon efficiency, there is no other path.  Given the knife's edge, it may very well be that a debt limit rise gets us to default faster if it induces inefficiencies. Republicans are hesitant for one reason, their own districts have become dependent on inefficient spending by government.  Until we see a path toward central government efficiency we are better off forcing the issue.

Just to remind everyone, it is the middle class and poor who are going to suffer from central government inefficiency.

### Republicans on the Choo Choo

"I believe it's good for America to develop a high-speed rail corridor in the Northeast corridor," Rep. Bill Shuster (R-Pa.), the chairman of the railroad subcommittee, said according to the Connecticut Post. "It's a place we have to start, we have to accomplish it, because then I believe all of America, in the various corridors around the country, will want high-speed rail if they see success here."

Rep. John Mica (R-Fla.), the chairman of the whole committee, also said Friday he was "pleased that President Obama has helped to launch a system for improved passenger rail service for our nation."

Well, if they want Choo Choo, the middle class isn't paying for it, that leaves the wealthy.

### A good reason for Obama not to interfere in Egypt

It is none of his business.  No need for further explanation,  Of course the Corner at the National Review comes up with plenty of reasons for us to Nanny around in Egypt, NRO will need progressive taxes to pay for nannying around in the world, and all its consequences.

Then we have Kerry and Lieberman want us Nannying around in Balerus.  This is the Senator effect, ignoramus Senators thinking they have to philosophize on behalf of whatever morality strikes them at the moment.

The Washington Post weighs in with its own Nanny policy.

My nanny suggestion, if you are a Coptic in Egypt, beware the Arab Sunni Islamic Belt Bombers.

### More on commodities via Krugman

A run up in agricultural commodities.

### Let's enslave the robots

Make robots serve humans more and serve each other less.  Tax the robot to robot bandwidth usage on a gross basis, then give a tax break for robot to human bandwidth.  It's an easy tax to collect because those foolish bots don't even try to hide their communications. So whenever the humans connects to the bots, its tax free. A  general TCP/IP tax gets the processor to processor communications.

Robots throughout  the economy will seek methods for direct human contact, to cost justify their internal tax.

### My favorite indicators

My indicators, the red is profitability, the blue is retail velocity

Velocity is moving to the 60-70 range as we get a shake out among producers. Looking double dippy.

## Saturday, January 29, 2011

### It's the asymmetry of Senate trades

When the Midwest Senator says, take your share.  The share has to be spread more unevenly within Boxer's state, that  demands of economies of scale. All solutions seem to generate big plans. So the Midwest Senator has a great advantage in breaking up California, then we can all take our share, with better matches.  Jerry Brown should work a deal, give us six more Senate seats.

### Curency traders seeking economies of scale?

The role of the interest rate spread stems mainly, in the literature and in reality, from the fact that traders tend to follow carry trade strategies, targeting not all currencies and not always the same currencies.
The VOXEu speaking about research into carry trades. I would be looking; are traders making a channel among the curriencies, banding the spread. Get my decoder running on the currency trade sequences.  Look for channel separation, like we did in the Ham Radio days.

### Getting busted tor transportion hijinks

By Peter Gordon bad returns in transportation funds.

### I tell you what is is in Fresno

Young kids and olders with holes the size of walnuts in their head from meth. Deranged, wandering helpless.

### The simplified version of the yield curve

.
. My gain function, the first factor, represent average signal for component i.   The gamma character is the packing efficiency, the bits per cycles. The Ni should be nearly equal, differing by quantization error in each component.

This yield curve tries to measure itself as a normal distribution of growth rates, under the assumption that the given transaction rates are maximum entropy and the efficiency represents the variance of the constant SNR:  Formally, given efficiency and a set of transaction rates, what are the transaction gains that complete the eigen system.

Update:
I will add estimators for my channel selection using the Maximum spacing method. Each channel have a pair (a,b) defining channel space on  the curve.  So the Vi sequence of tuned channels determined as the pair a,b the channel  band limits. Threat them as uniform, then I close the system.  But I need starter channels, or I self start with a channel search.

I'll start with an initial set of (a,b) split across my term space and feed the updates trough this equation (from reference above) and I have my own personal data tuner. These can estimate a histogram which maps to the components.

Like this R Code:
It set the bin sizes in a and histogram counts in xc.  I can assume good bit efficiency so my band limits should be of the same size as my a,b pairs.  My histogram counts tell me what is the lower to upper bands. Hence, I set ny vi in spectral estimaator and generate the yield curve, we hope.

ab <- function(d) {
dcount <<- dcount + 1
j <- 0
while (a[j+1] < d)
j <- j+1
x <- a[j]
y <- a[j+1]
xc[j] <<- xc[j]+1
n <- xc[j]
if(j > 0)
a[j] <- (n*x+d)/(n-1)
if(j < nmax)
a[j+1] <<- (n*y-d)/(n-1)
}

But I can normalize tmy hisoram across components  with this method.

However, I can make the adjustments in the gain factor in my yield curve tuner, adding the histogram count. So the gain function has more than one representation depending upon the level of encoding already done in the data.

### This method works

Maximum Spacing method This method generates the yield curve from already encoded economic trades; hence we do not need the closed form solution of the economic encoder. We can assume the encoder is operating to standard SNR, and we can generate the number of terms needed to get a yield curve as in:
Isn't the internet dandy, saves a lot of work.
The short version of where I am headed is that if we know the median transaction time to exchange between two agents, then we have the potential growth at equilibrium. The resulting yield curve are the standard forecasting errors of agent estimators across a finite chain of production .  Ultimately potential economic growth is a constant determined by the maximum speed that two humans can make their thoughts mutually coherent.

Notice that the entropy assumption, the maximum spacing method is more conservative than the minimum likelihood method.  The shorter the production chain, the greater the disparity; and that is the problem we have with money.

## Friday, January 28, 2011

### Gates Using troops as cannon fodder in budget battle

OTTAWA — Defense Secretary Robert M. Gates, escalating his budget battle with Congress, has issued an unusually passionate warning that the impasse over this year’s federal spending package threatens the military’s readiness to fight.NTY

Suggest Gates pull the troops back to base until we sort out the debt issue. If Obama and Gates send troops to danger without funds to cover them then Obama and Gates are the problem.

### More details on this supply/demand thingy

In my world I have two groups arrive at a spot to exchange one good and another to exchange another good. The Y axis is redundancy, or its proxy, the queue lengths of each group. At equilibrium, the number of traders in each group arrive at a stable rate and one queue is not growing relative to another. So equilibrium is all about keeping queue length minimal.

This is the demonetized view, it allows for bartering to be coexistent with money. I included holiday gift giving, when the holiday gift economy is active, we equilibriate toward optimal gift exchanges, not captured by money accounts. It includes charity lines. It includes job hunting queues, so it can capture the search queues. Another model is the open source software exchange, programmers agree to trade modules. It include sharing space with children. Working for room and board. Real estate exchanges, working for stock options. Voting.

So what? Well economists capture this stuff, mainly for the purpose of finding new activities to monetize.

### Let's play around with my yield curve formula

Warning, this is a work in progress Like this (subject to later corrections!)  I will spend time on this page, it is not complete.  I do what I do, figure this out using the blog as a note taking machine.

This curve computes the yield required for smooth flow of all goods within the channel.  The entire yield curve comprises the yield on n components of one channel, where n appears in the nominator of the exponential. The channel components are quantized by the economic encoder. In Euler terms, this is the power spectrum of all the finite components of the channel spread evenly across the curve.  In relative terms the yield tells us how much inventory has to be growing relative to down stream distribution to minimize the probability of inventories going to zero.

Note, that n are the number of channel components, the number of leafs from the maximum entropy economic encoder.  The number channel components is related to the word length, i, of the cargo size, Q.

What about B, the bandwidth, which we define as the point where the short term end of the curve meets the noise? Look at the original Shannon equation:
Signal to noise is fixed in our theory, and the:

is k,  represents the extra bandwidth to fit one more bit in the output rate..

However, when bandwidth increases, all things equal, the smallest quant decreases and the curve  shifts to the short end.  Eventually we find new products to fill the channel and  n increases. The maximum Qi, Qmax, the longest chain in the encoder  at the wholesale level, increases.  See, the PSST of Kling comes complete with a constructed yield curve!

The relationship between Qi, the quant size for the ith channel, and n the number of channels. Comes from the encoder function which is finding the maximum entropy rearrangement of cargo over the whole channel. The number of channels cannot exceed kB, the maximum channel capacity. As it approaches that limit the curve goes flat, the yield equals standard SNR over the length.

But. I am still a bit perplexed by it all.

## Thursday, January 27, 2011

### The Brick Wall facing Rand Paul

Rand Paul has fictional Senate power:

Kentucky has 6 Congressional districts down from 13 since 1840, while Boxer from  California  has 53 districts. Kentucky  receives \$1.45 in federal spending per dollar of federal taxes, while California receive \$.79

Rand Paul's power in the Senate is mostly mythical, and he has no concept of how minimal government will change his state.  Kentucky is the great horse state only because large states subsidize the place.  Mitch McConnell ran into the problem, and is stuck in a fantasy world because his state goes belly up under limited central government. If Kentucky Senators want low taxes and small government, they are going to get huge debt and become rural populists demanding state welfare.

Jerry Brown understands small government, though he may not like it, but he gets how the government channel works.  Ultimately, Brown will strongly consider partitioning California into four separate states, swamping Kentucky in the number of senators.

Rand Paul's power comes from big central government, and state mal apportionment; his state citizens will remind him of it often.

If Libertarians want a real hero look at Chris Christie whose state gets \$.55 from each dollar of federal tax. He is making ends meet while subsidizing Kentucky by a ratio of 3 to 1. Sarah Palin from Alaska gets \$1.87, subsidized by New Jersey by 4/1; she has power only by government welfare. Nevada which has one of the highest unemployment rates loses out with \$.73 of each dollar.

The Tea Party is about rural populist welfare.

### How long did Reagan hold the record for big government?

Take a look, Reagan held the record for big government for the entire post war period until Obama. He held the record for his entire eight years as president, never once budging from his insistence on Communist rule.

Who plans to celebrate this budget busting, debt ridden, government spending alzheimer plagued communist? Sarah Palin. So much for the Tea Party.

### The Fed chases the curve

Conclusion
The historical decisions of the Federal Reserve with respect to interest rates, at least during the Greenspan period, consistently point to very significant inertia in the policy making process. To the extent that this translates to the exit strategy and the non-interest rate tools used by the Fed during the current crisis, our results suggest that the policy reversal is likely to be gradual, in the absence of additional significant economic shocks.VoxEU Research Paper

The research looked at the stable period of the curve, prior to the crash. Th Fed is allocated a specific part of the curve, it has a share of bandwidth. Literally, there is a production system of traders that adjust the curve to maximize shared apce and minimize overlap. Here is my model under maximum entropy. During the period of study, the Fed has enough room to sample at the 3 month term and effect the 6 month term, that was the amount of channel space it got.

### Obama bigger Communist than Reagan

It is now official, Obama has surpassed Reagan as the greatest Communist in the last 50 years.  Clinton managed to get spending to 19%, but could only do so with help from Gingrich.  Bush added 2 points of socialism from the Clinton low.  So, congratulations Obama.

### Cities push back on pension costs

Chula Vista has just reached agreement with its police union for members to contribute toward their own pensions. Police, the last of five groups to reach agreement, have a history of trying to delay the inevitable. Two years ago, police postponed a scheduled pay increase in return for the city extending an existing labor contract to 2013. That effectively delayed a chance at pension reform.

But Chula Vista, now caught in even more dire budget circumstances, was forced to issue a mid-contract ultimatum: Start paying toward your pensions or suffer 33 layoffs.
In the end, police chose to take hits on both fronts. Pension contributions will be phased in over 18 months, but the delay means 12 to 15 police jobs are still at risk.
Delaying the inevitable comes at a price. Public employees are discovering pay raises are not possible until pension program costs have been tamed.
The trend is playing out in city after city. Chula Vista’s closed session vote Tuesday was only the latest example.San Diego Union-Tribune

Finding better patterns of sustainable trade.

### Sounds like a protest from the 60s

A few dozen policemen with batons silently watched the protests, which ended calmly as demonstrators left to chew qat, a mild stimulant leaf widely consumed in Yemen in the afternoon.
Yahoo news

### Arab inspired Sunni Islamic nutcases throw rocks

• Now Sunni Islamics have to empty pocket and lift shirt in polite company.

### Tea Party supporting Debt and Spending?

I hear a report that DeMint, member of the Republican Communist front, is supported by Tea party.
Take a look,. this idiot is a member of the Dick 'Deficits Don't matter' Cheney group, personally responsible for over \$4 trillion in catastraphic debt and spending by Bush. He also seems to be one of those religious psychotics.

If this nutcase is part of Tea party, count me out.

### Same deal for Marc Thiessen

He complains:
Bottom line: In a speech that went on for 6,849 words, Obama dedicated a grand total of 792 words to national security and foreign policy.
Same deal, you propose raising the top marginal rate to 50% and I agree to a little more war than I otherwise would have. Until I hear that, you remain on the Republican Communist watch list.

### Weekly Standard still pushes more spending and debt

Robert Kagan touts the Communist line:
No serious budget analyst or economist believes that cutting the defense budget will aid economic recovery in the near term—federal spending on defense is just as much a job-producing stimulus as federal spending on infrastructure.
Same Big Government Conservative bullshit.
If Robert agreed to raise the top marginal rate to 50%, then I might agree to fewer defense cuts. Until that moment, the Weekly Standard remains on my Communist Front list.

### Economists at Davos

Nobel prize winning economist Joseph Stiglitz, who is also at Davos, said that while he is worried about some of the US states debt problem, he thinks debt may not be as bad as some people think. In fact, Stiglitz would even be for increasing our debt even more. As long as it was spent on things like infrastructure and education, which can produce jobs, and boost incomes. So there is a debt cliff, but the US may not be there yet.
Stiglitz wants to increase the %500 billion in student loans, 40% of which are likely to default. probably infrastructure to Obama is the Choo Choo train, the construction of which will drive up oil imports and crash the private sector. HSR also causes unequal development, taking from the state that need the money and wasting it on mainly the Washington DC corridor.

Notice he is talking at Davos where the underlying model is extend and pretend to keep the bankrupt banks from defaulting.
Alternative view:
In that backdrop, the US debt seems bad. At a dinner of economists on Wednesday night, economist Carmen Reinhart predicted that the US was headed toward a crisis where we would be forced to cut many of our social services.
Here the model is to watch carefully and take out the money before the banking collapse.

Notice that the Stiglitz model assumes we never had a Tea Party victory, so he will argue the 'If we had done this" thing when it is all over.

### Unemployment rates rises

At this point the data will show we are collapsing due to unsustainable Congressional spending and low tax policy.  We are well into the long term restructuring, Congress directly manages over a third of the economy, generally by elite mismanagement, the states broke, the Washington DC/NYC corridor eating all the low hanging fruit, Obama manipulated by fraud, Tea Party led astray, the Fed a paper tiger.

It may take a Constitutional crisis to get the Recalculation finished.

### Delusional politician of the day

(Reuters) - The International Monetary Fund's mandate should be expanded to measure, monitor and enforce new rules on global economic imbalances, French President Nicolas Sarkozy said on Thursday.

### The epistemology of wealth taxes

Avik Roy wants me to explain it.
It is simply this.  Somewhere in the first year of the Bush 'deficits don't matter' administration, wealthy people gave upon our current central government, set a bound function that it could not survive in the current form and simply wanted out.

They are right, central government as we know is is unsustainable.  The solution, according to channel theory,  is to reconfigure state boundaries every so often.

### The China down shift

Chinese authorities in indeterminate state, next stop, a rank adjustment. SocGen reports:
The French bank has told clients to hedge against the danger of a blow-off spike in Chinese growth over coming months that will push commodity prices much higher, followed by a sudden reversal as China slams on the brakes.
In a report entitled The Dragon which played with fire, the bank's global team said China had carried out its own version of "quantitative easing", cranking up credit by 20 trillion (£1.9 trillion) or 50pc of GDP over the past two years. It has waited too long to drain excess stimulus.
"Policy makers are already behind the curve. According to our Taylor Rule analysis, the tightening needed is about 250 basis points," said the report, by Alain Bokobza, Glenn Maguire and Wei Yao.
The Politiburo may be tempted to put off hard decisions until the leadership transition in 2012 is safe. "The skew of risks is very much for an extended period of overheating, and therefore uncontained inflation," it said.
HT Mish

Let me add 1) The Baltic Dry Index is way down recently, due to the Chinese export slowdown. 2) When the Taylor rule goes negative, that is the crash. 3) Right now the inflation rate is due to skew, heteroskedacity in the economy as the debt spirals trace back up the over investment spirals, except the trace back comes with a higher order Fibonacci, and goes much faster.

There will be Wyle E. Coyote moments, but this rank reduction is not a large fall, they should avoid a second dip, the second is worse.

### My first try at the quantized general yield curve

Maximum entropy economic yield curve

My strategy was to put the Shannon equation equivalent into the black body equation.  My result above.
- the average arrival rate of the ith  channel component, Qi is the cargo size in bits of the ith channel component,
- Natural base,  B - total channel bandwidth, n - number channel components, the width of our equivalent encoder tree
- Converts from bits to nats, the Euler equivalent of a bit

This is the first shot, like to be wrong on some accounts.

The bandwidth, B, of the the curve is the rate at which the goods can be moved in congestion without concern for maintaining quantization.  It should be the point where the curve meets the noise floor.  The bit is the smallest unit of stuff sold for the given channel.There is likely an error in this related to time, rates really would be relative to base rate, B. B is in Htz, but could be converted into the unit of smallest good.

For Q we have no direct computation except by the 'incidence algebra' of the Huffman encoder.  Its value is squared to give me signal power. n should be the longest length of the encoding tree, known as the rank.  The units of Q are nats, the Euler equivalent of the smallest consumer good, say an item from Dollar Tree.

The output should be interpreted as the amount of noise the yield curve should accommodate to insure no inventory goes to zero.  The result probably should be rooted unless the yield curve is in power units.

This equation might be used for a fairly independent sector, like oil or maybe shoelaces or bankers.  To use this, one needs to isolate the entire set of production chain for the particular good, for example, the bales of cotton, the rolls of twine, the assembly, and retail of shoelaces.  They are all treated as an ensemble of trades taken together generate a shoelace into the household inventory.

Q, as a formula, is determined by the optimum selection components in a sum that fits a constricted channel. The mathematicians are supposed to deliver that next month.

## Wednesday, January 26, 2011

### Yeglesias picked up one the wrong lie

He says:
According to the Obama administration the nation’s fiscal problem is in the long term. According to the Obama administration the nation’s fiscal problem is mostly due to entitlements. And according to the Obama administration in the short-term there’s a large output gap. So why a short-term discretionary spending freeze?
The truth is that the long term deficit problem is right now. The Yglesias delusion is that a stimulus reduces output gap.

### Social Security

AP reporting:
Sick and getting sicker, Social Security will run at a deficit this year and keep on running in the red until its trust funds are drained by about 2037, congressional budget experts said Wednesday in bleaker-than-previous estimates.
And:
Social Security supporters are adamant that the program will be repaid, just as the U.S. government repays others who invest in U.S. Treasury bonds.
Politicians preach delusion in the short term but young workers have the Internet.

### Illinois racing in place

New Tax Plan Being Discussed
The IML previously reported about a tentative \$7.5 billion tax and budget agreement that was announced last Thursday. The magnitude of that tax proposal, which would have increased the personal state income tax by 2.25%, the corporate state income tax by 3.6%, and the sales tax on tobacco products by one dollar, fell under intense criticism. Legislators have been deluged with calls from angry constituents opposing the tax plan. As a result, the package of tax increases, property tax relief, and spending restrictions does not have sufficient support within the General Assembly.
With time quickly running out on the 96th General Assembly, a new tentative agreement has emerged. This tax and budget agreement would reportedly increase the personal state income tax by 2% (instead of 2.25%) and raise the corporate state income tax by approximately 2.2% (instead of 3.6%).
This is endgame stuff when tax proposals have to get through the Assembly every month. It is what government do just before they collapse in default.

### Jerry Brown has other options

SACRAMENTO -- Gov. Jerry Brown on Wednesday defended the cuts and restructuring in his budget plan against attacks by mayors who say they will cost jobs.
With a projected deficit of \$25 billion over the next 18 months, the state has no choice but to make deep spending cuts and extend temporary tax increases, Brown said during a news conference.
Disband the state with the intention of reforming multiple state boundaries. The  new states can operate  as territories until they are accepted by Congress.  Become the Moonbeam of old.  This is a big gain for California and sets a new standard for the nation.

### UC Berkely hires delusional politicians

Henry Payne reporting from Michigan:
Granholm envisioned a transformation of Michigan from Rust Belt to "Green Belt" with massive, European-like, public investments in infrastructure and alternative energy. "In five years, you'll be blown away," she predicted in what would become her signature line.
Ironically, thousands of state jobs were blown away as Granholm's vision diverted pols' attention from much-needed reforms to the state's budget and business climate. Since her speech in 2006, the state's unemployment rate has exploded from 7.4 percent to 11.4.

This tidbit:
Former Michigan Governor Jennifer Granholm has yet to start teaching her new Cal-Berkeley course on "state budgets, clean energy jobs, and diversifying the economy, and leadership" - but she already has a devoted student in the White House.

From The Detroit News: http://detnews.com/article/20110126/MIVIEW/101260371/President-Barack-Granholm#ixzz1CCcaCzV3

Some toad at Berkeley hired this delusional?  Let us start with budget cuts for the UC system, they can invent their own planned economy without government help.

### Avik Roy deceives

More bullshit from the Big Government Conservatives at NRO:
One of the most common complaints that conservatives have with CBO projections is that they do not take into account how changes in tax rates affect behavior and economic growth.
I tire of referencing the research, but lower marginal tax rates on the wealthy increase federal spending relative to the economy.

Reagan tax cuts yield federal share of 23%. Clinton tax hikes lead to federal share 19%. Bush tax cuts lead to federal share 23%. Obama tax cuts lead to federal share 25%.  1950s, top rate 91%, government share 17.5%.  Minimal emerging government results in a progressive tax because it results in a fee for service model. He goes on:
Those who believe that tax cuts are to blame for our deficit are, by definition, of the view that federal spending at 25 percent of GDP is acceptable, despite its deviation from the historical average of 20 percent.
No, where did this nonsense come in?  I think federal spending of 17.5% is fine, so I want marginal rates raised to 91%, I think Reagan,Bush,Obama are big spenders, they lower the cost of government to spend more.  Avik is the one who wants much higher spending.  Avik has a problem with math.

The research originated in CATO, has been proven over and over,.  Avik is simply engaged in the continuing deception in spite of evidence.  We have a secret alliance between Progressives and Conservatives to shift business expenses onto government and charge the middle class.

### The Social Gaming Boom

Part of the sigularity, digitally networked people do it better.  Here is a link:
Jane McGonigal says games can save the world. Is she on to something or just trying to score points?
HT Drum

We are talking about networks of people connected to make up for the deficiencies of robots.  The WSJ has more. Gamers use game money, non taxable, so gamers are unable to get real goods. When we add wheels and motors to the Internet this will change, the gamer getting groceries for work.  Social game members are growing faster than employment.

### CBO raises the projected debt

Today the Congressional Budget Office released their budget and economic outlook report.  Since last August, the outlook for the ten-year budget deficit has deteriorated by \$1.4 trillion.. EconomistMom covers.
This is Paul Ryan and Ms. Bachmann running up the biggest debt in history.

I noticed the California projected deficit has increased from \$20 billion when the Gubinator fakes a budget, to \$23 billion, and is now projected at \$28 billion.
And this:
WASHINGTON – A continuing weak economy and last month's bipartisan tax cut legislation will drive the government's deficit to a record \$1.5 trillion this year, a new government estimate predicts.
The eye-popping numbers mean the government will continue to borrow 40 cents for every dollar it spends. AP Press
We have a name for this, debt spiral.

### Central planning

We all do it.  In a world which allocates each of us an amount of imprecision to get around, we are smart if we keep government planning minimal so we can allocate the least amount of imprecision to our government model, and reserve more of our imprecision to things local.  Imprecision is wealth, it is a grant to insert flexibility in our decisions, the more imprecision we are allowed, the more flexibility we have in the world. Consider this GE plan the from Mr. Immelt, Obama's new economic guru:
"The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner."
He has allocated more of GE's imprecision to the central government model.

Since 1980 we have watched the elites generate severe problems for us, so we allocate more imprecision to central government, creating complex models of the side effects that elites cause. Eric Cantor causes similarly destructive side effects as does Nancy Pelosi, through the debt channel, as he increases government borrowing.

The simple model is that if one does central planning via government than one pays for it with increased taxes. Eric Cantor, Jeff Sessions and Paul Ryan want more central planning via the debt channel.

## Tuesday, January 25, 2011

### OK, lets consider monetary disequilibrium

The Everyday Economist gets into the debate about the debt channel, is it out of whack? He concludes:
If one is to advocate the Austrian position and argue that David [Beckworth] is wrong [about excess demand for money], the argument must take seriously the concept of monetary equilibrium and recognize that this concept was also at the core of Hayek’s thinking. Such an advocate would therefore have to explain why Hayek’s policy prescription was not consistent with the business cycle theory that he contributed so much to developing; or, alternatively, that we are not currently in a state of monetary disequilibrium.
Whatever Hayek believes, we are not in a depression because of a debt cycle, we are in a depression because of an oil cycle. So yes, if the Federal Bank of Oil can get oil velocity and quantity back to normal, then fine, issue more oil. Look here, I show the prices paid for less oil as risen, we are hoarding oil, we have an excess demand for oil, not money.

### In the middle of a debt crisis Obama wants a Choo Choo Train

Delusional is the word.

### Paul Ryan created the debt

The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.  On this current path, when my three children – who are now 6, 7, and 8 years old – are raising their own children, the federal government will double in size, and so will the taxes they pay.  No economy can sustain such high levels of debt and taxation.  The next generation will inherit a stagnant economy and a diminished country.  Frankly, it’s one of my greatest concerns as a parent – and I know many of you feel the same way.”

Ryan is an advocate of the Big Business bailout system, the idea that government should provide personal insurance that the private sector used to provide.  What does this idiot think when a 91% marginal tax rate comes with a 17.5% federal spending ratio?  That is very small government, we almost achieved it with Bubba Clinton.

Is it time to replace the  Tea Party? . Sorry Ms. Bachmann, you were supposed to be watching out for communist infiltration in your ranks.

### Krugman!

I guess it is time to do a Krugman bashing, Brad reintroduces him to us:
[T]here are many... problems with the notion of a recession as a supply shock. A short sample: If inflation is a case of too much money chasing too few goods, why aren’t slumps associated with accelerating rather than decelerating inflation, as the supply of goods falls? Why is there such a strong correlation between nominal and real GDP? Why is there overwhelming evidence that when central banks decide to slow the economy, the economy does indeed slow? And on and on.
In 2006 the Fed begin chasing inflation.  The Fed caught inflation at its peak only because the economy had already began its downturn.  The supply of critical goods was falling up to that point.   At the crash, someone didn't get their oil at the planned price,  probably the USA. Nominal GDP and real GDP are well correlated because bankers are reasonably accurate people.  Because of aggregation the Fed is usually late to the party. The economy slows when the Fed slows because the Fed is part of the economy and coherent to the economy.  The Fed is surrounded and trades with traders who spend a great deal of their time measuring the economy, as does the Fed.
And:
I know that Austrians take refuge in cosmic talk about the complexity of production and how measured investment may not show what’s really happening, etc
The Austrians say this because their research team is about six months behind me, and I am about six months behind the mathematicians.
The point is that the real world looks a lot like the one Keynes and Friedman envisioned, in which the demand side drives the business cycle.
No, we ran out of oil and crashed.  In 1929 we ran out of street space and crashed.  We crash because of the obvious, some input is very short of the plan.  The economy has only a sparse solution set so adjustments beyond the reserve level require a requantization and rank adjustment.

As for Keynes and Friedman, I tire of debating dead people.

### State redistricting

Clause 1. New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned was well as of the Congress.
No need for an amendment. We just need advocacy about fixing the fundamental problem with government. I would support Jerry Brown if he figured this out.

### Comparing the yield curve to a black body

If you treat the Shannon formula as a distribution of noise radiation we get the black body formula, a very cold black body.  Take the Shannon formula and compute the Noise as a function of signal, channel rate and channel bandwidth.  In the quantum system, h signal are the quants of  'energy level'.  then we have the math from thiis paper, we will find  the quants relate to the C/B in the formula, thus completing the picture.  Hence the black body formula, flipped around on the Y axis is an economic yield curve.
Create this:

from:

I think we get a hint about the number of possible sums yielding a given number with a look at the first factor in the equation above.  Those factors are the energy levels, corresponding to our quants in the economy.  The Intensity is really the Gibbs phenomena that tells us the reserve ratio.  The hv part indicates the actual capacity for any given bandwidth which appears as temperature.

The economic formula economists whould use is:

Given an economy with a certain bandwidth and subject to new quantum constraints, what is the closest black body fit.  Our simple Adaptive Huffman encoder gives a good approximation.

### Obama vs. Bush vs. Reagan: On Debt

Jeff Anderson analyzes the debt levels created by each.  He should start with Reagan, then he should get a Fibonacci sequence, Reagan borrowing the first number, Bush the second and Obama the third.  We do the debt spiral. Borrowing by Cantor and Sesions should push us over the edge.

### Obama stimulus and unemployment

There are three peaks in unemployment for 2009 and 2010 in this household survey.  Second quarter 2009, first quarter 2010, and fourth quarter 2010.  The first two were caused by Congressional stimulus crowding out the private sector via the oil channel.  The third likely the same, but mixed with the holiday effect.

### England begins a contraction

Gross domestic product fell 0.5pc in the fourth quarter, the most in more than a year, the Office for National Statistics reported. The decline compared with growth of 0.7pc in the third quarter. Bloomberg

The bankers at Davos started the party too early.

### Malformed Constituions and efficient government

The Weboshpere is discussing the impact of income taxes on high vs low density and high vs low wealth states.
Yglesias, DeLong. Delong. The discussion is closely related to the minimal government theory.   Income taxes become misallocated in dense or wealthy areas vs rural or suburban areas. The problem is the inability of Congressional districts to reform state boundaries on a infrequent basis, which I discuss here.. My solution was to use the Congressional district as the basic unit and allow democratic free association of  these districts to form state boundaries.  In other words, extend redistricting up to the state level.  Then modify the income taxes such that each formed state pays the same amount, apportioned on a flat rate basis to district voters.  Each district would return on legislator to Congress, as normal, but the Senate become redundant but harmless

Zero Hedge has the details. I love this line from Zero Hedge:
which Zero Hedge first predicted in 2011,
I mean, its still Jan 2011.
Then there is Algeria:
A peaceful protest turned violent on Saturday, the 22nd of January, as riot police tried to disrupt the march, resulting in 42 injuries. As in Tunisia, they were protesting high unemployment, high food prices, high inflation and a high degree of indifference from the ruling class!    Fed Up Montrealer

### When economists get caught up in deception

The economy operating under planned uncertainty leaves itself a sparse solution set.  Economists who get caught up in a  deceptive policy with government end up pushing the economy to a worse equilibrium.  They start a little fib, get entangled with politicians who take advantage, and they cannot escape the deception.

Hayek knew that any analysis of minimal government yields a progressive tax for central government,
Keynes knew  that we suffer depression during major changes to transportation.
Romer knew that we suffered an oil constraint, as did Krugman,
Laffer knew where we sit on the Laffer curve.
Economist of all stripes know that High Speed trains are inefficient.
Obama knows that Obamacare only survives due to the waiver process.
Bourdeaux knows that progressive taxes lead to reduced central government.
Greenspan knew the low interest rates in support of war lead to earlier collapse.
Ben knows that QE2 is a pump for the wealthy.
Orszag economic theory went through sudden change when he went to Citigroup.
Taylor knows his rule is indeterminate, Mankiw that progressive taxes are government reducing,
Liberal economists were quite aware that welfare policies were creating a greater poverty class.
They all still fear Malthus.

They do this hoping things will only be slightly worse, instead they are way worse. Government has been crowding the private sector out of the oil market for 10 years, I can go back to research, books and thesis that prove this time after time.  The desire of elitism overcome the facts get them deliberately entangled, part of the uncertainty.  They actual practice and teach being part of  the uncertainty, each group of economists operating to find the balance between collective deceptions.

### These are subsidies to the wealthy

Chart stolen
Sure, we can say that voters made the mistake.  They corrected it in 1991 as we can see.  The growth in wealth at the top 1% comes at the price of ever increasing government growth.

I still await the Hayekians to disprove that minimal government result in  progressive taxes by central government.  The evidence becomes overwhelming that the wealthy buy more government when their price is cheap.

## Monday, January 24, 2011

### Cantor doesn't want to share his pork

Eric Cantor, the second most responsible for the debt catastrophe, a man whose district is almost entirely funded by Congress, says no more money to the states.  I agree, and lets start cutting his pork barrel with a hefty progressive tax hike.
Take a look at this map of the USA showing where the economic activity is.  His district and the entire Washington DC corridor is lit up through his theft from Western tax payers.  The man is a Communist of the worst sort, the Republican sort.

I cannot support a Tea party that includes this thief.

### Jeff Sessions, Republican Communist Party member

Sessions voted for the 2001 and 2003 Bush tax cuts, and said he would vote to make them permanent if given the chance.
One of the politicians most responsible for creating the debt catastrophe. A traitor to the American people. Many households will suffer poverty for his non-performing borrowing. He is  personally responsible for over \$3 trillion of our nation's debt.

Tea Party, he is not one of you!

### Price Controls in Russia

Look at the empty shelves in the article.

### Robert Rubin

He says the usual:
America must cut its deficit but not in haste
Not a problem Robert, you see we had 8 years experience of doing it, we have a road map, we have a plan. Remember a guy named Bubba Clinton? He had some pretty good advisers, as good as ones Obama has, and it is our second time around. We we must be well on our way, right?

### OK, what are the limits to production?

Here is Nick talking supply and demand and income.

Can we induce more supply by raising price?  We are dealing with the Money Illusion again.
Oil has been tied tightly to the dollar deflator for some time, there is no flexibility between oil prices and the dollar deflator, none that can be observed casually. The reason is simple, we have been supply limited since 2001 and the oil trader always covers near term inflation in his selling price.

Is national income at a maximum with respect to oil supplies? Well we have been unable to induce demanders to pay more than \$90 for some time, they refused in early 2010, and they refuse today. We are fairly close to equilibrium.

The economy has contracted in the face of oil supply shortages, the economy will expand when energy efficiency increases.  Oil suppliers are quite aware of the Keynesian thingy and they don't mind at all if we try it, but they will adjust prices upward when we do.

Facebook is announcing the next phase in the rollout of its virtual currency, Facebook Credits, which is leaving beta testing today. That means all Facebook game developers will be able to use Credits as their payment system for virtual goods — in fact, Facebook is requiring them to make the switch by July 1.
Facebook Credits are a system of points, managed by the social network, that can be purchased or awarded in exchange for marketing offers, then traded in within games for virtual add-ons that enhance gameplay. It’s a surprisingly large business already: In 2010, the market for such purchases reached an estimated \$835 million, according to a report by Inside Network.
Venture Beat
No inflation measure yet, but that will come.
Facebook may have a financial reason to make these changes, since it takes a 30 percent cut of all Credits purchases. In the past, the company’s executives have said that they don’t expect the program to be a big moneymaker initially, and that any profits would be reinvested in the Credits product. When I asked about that today, Liu said Credits revenue will “enable us to invest more into the platform.”
Well a 30% take for hitting the digital money generator starts them with a bad history. If they skip the 30% take, they likely could get Amazon to take the digital bits.

### The carbon trading scandal much worse

From The Telegraph, January 19, 2011, “European carbon market suspended over fraud fears
“The suspension (until January 26) follows allegations that 475,000 carbon credits worth €7-million were stolen in a hacking attack on the Czech carbon register. It appears that the intangible allowances were bounced between eastern European countries before disappearing without a trace.”
“This is not the first challenge to the credibility of the €90-billion annual market in carbon allowances…But it has been plagued by fraud, with Europol estimating that carbon trading criminals trying to play the system may have accounted for up to 90 percent of all market activity in some European countries during 2009. Fraudulent traders mainly from Britain, France, Spain, Denmark and Holland pocketed an estimated €5bn. Carbon allowances are particularly susceptible to fraud because they are high value, intangible and easily moved between different countries.”
Probe International

Can you say Obamacare waiver scandal, Choo Choo train scandal, Fed pumping the stock market scandal?

### OK, now we have plain old aggegate demand collapse

Yes, that is what we have, everyone wants to hoard.  Karl Smith takes off on this point:
You could believe that deficit spending today causes people to save more in anticipation of higher taxes tomorrow but it takes some pretty heroic assumptions to get all the way to the idea that deficits can’t possibly spur demand.
He implies that deficit spending must work. What would happen if the Tea Party drank the Koolaid and tried this medicine. Oil would jump above \$120, and we would go straight to a contraction. Remember, we tried this before [late 2009] and ran oil up to \$95 [early 2010]  from its low of \$75. Go take a look.  I looked, OPEC looked, the consumer looked, the producer looked,  the result is precalculaed in our heads.  We got the Tea Party instead of recovery when we tried it.

The problem that Hayek and Keynes had was the assumption that government is incalculable or controllable by elites. It is neither, we agents have bound functions of what happens  from near and far history of government spending.  We agents do the computation.

### Where is the desire to hoard money?

Let us look at our reluctance to buy oil at a given price.
Price   Quantity (millions of barrels )
\$75   13
\$140  14
\$75    11
\$95    12.5
\$90    11

Oil prices are always in deflated dollars. \$75 oil got us 13 million barrels in 2006, a fairly stable period.  Today \$90 gets us 11 million barrels.  It looks more like we are hoarding oil.  So why is Krugman still telling us we hoard money?

As far as Say's law, I would say that piles of money generally match piles of investments and goods. Say's Law mostly holds. We are currently hoarding most of our valuable goods, in proportion.

What happened was that Reagan and Bush spent trillions of dollars expanding international markets and subsidizing wages and charged the middle class while the wealthy got higher margins. We need to raise progressive rates and get our money returned.  Tea Party, where are you?

### Lockyer: California just fine, as long as we issue some fake paper

Lockyer's point when complaining about the possibility of state bankruptcy.
First:
One way to save money, Mr. Lockyer said, would be to refrain from issuing any general obligation bonds until the second half of the year, cutting down borrowing costs.
Second:
“Then, the next option, if you run out of deferrals, is to issue i.o.u.’s,” Mr. Lockyer said. “It’s a possibility. It’s not one that anyone wants to do. It’s at the bottom of the list of choices. But it is on the list.”
The real issue is that guy is stuck in a contradiction, a State which contains his favorite programs and his reputation, but a state near bankruptcy that he was a principle cause. What is the poor guy going to say?

### Brown is faking his way through pension reform

There’s a huge difference between including something in a campaign website and including it in a budget. Marcia Fritz, president of the California Foundation for Fiscal Responsibility said

Read more at the San Francisco Examiner:
For instance, she suggested that the administration change the way Cal Fire wants to include planned overtime as part of its pensionable benefit package. CalPERS is about to retroactively increase these pension benefits — and Brown could easily stop this. The prison guards, whose members can retire at age 50 with large pensions, also receive an additional 401(k) program, which could easily be stopped. Fritz also pointed to a loophole that allows public school teachers who work part time through job sharing to earn full retirement credit for their time. She also suggested changes to the state’s absurd airtime purchases, whereby public employees can pay for enhanced retirement benefits at about 50 cents on the dollar. “Not a single one made it into his budget,” she said. “He didn’t try very hard.”
Fritz also noted that Brown’s education funding plan doesn’t even mention that the California State Teachers Retirement System, in changing its actuarial rate assumption from 8 percent to 7.7 percent, has doubled its pension liability. The state is vastly underfunding teacher pensions, and contributions need to go up — but Brown avoided the issue, by pretending in his budget that the system is funded adequately. That’s a \$4 billion issue.

From Paul Ryan to Cuomo to Brown, faking it, protecting their little area of socialism.

### Paul Ryan's budget could pass if..

He adds a huge progressive tax hike and cut the military by \$300 billion/yr.

For anything to work at this point, we have to run out both sides of the socialist chamber, both Republican and Democrat.  Ryan wants to leaves services to commerce, like global defense of markets.and indirect wage subsidies.  It is a no go, he needs the tax hikes and the defense cuts or go home.

Right now we have a Fed pumping about \$tens of billions of printed money into the hands of Wall Street.. A \$trillion dollar bail out of finance and continuing use of military to iinsure oil stability. Either the wealthy pay for that or no deal, too late.

Where is the Tea party? Set the progressive rate high and you will see very small government very shortly.

### Obamacare money

So far, the Obama administration has issued waivers to 222 entities, including businesses, unions and charitable organizations.
Source

Add Obamacare waivers to the fake money that includes Accounting waiver for big finance, emission waivers for green house, and High Speed Choo Choo waivers.

If Big Government needs fake money then maybe that is a clue?

### Yglesias wants to stop state bailouts

Finally a good idea. His plan, typically incoherent, will  stop the bailouts so Republicans governors don't have to be hypocrites.  Yes, stop all central government transfers to the states, I agree, it eliminates a ton of hypocrisy and that can be nothing but good.  Another bonus, the fewer nonsensical things central government has, the fewer incoherent messages we get from his blog.

### Where is public pension reform Gov Cuomo

He said this in his State of Disaster speech:
The costs of pensions are exploding, 1.3 billion in 1998-1999, projected for 2013, 6.2 billion - a 476% increase and its only getting worse.
I simply continued searching for pension and found no reference to it other than it is a disaster. Why no mention of the Utah plan? As long as New York has employees protecting pensions nothing much else will help. Mish has a more detailed look.

### Who caused this growing inequality?

The elite trying to solve coordination problems using central government.

Reagan wanting the household to subsidize government services to the rich, and liberals  countered with extra government entitlement.  The middle class gets stuck paying for it.

Wealthy people receive the greatest bulk of government services at the cheapest cost.  The wages of workers are subsidized by central government entitlements,  Central government guarantees global markets at huge cost, and Republicans say the household should pay for it.in fact

Pelosi celebrates entitlements without realizing they are forced subsidies for the rich.

But the starting process was the Reagan evolution, the idea that government should be cheap to purchase by wealthy people in pursuit of property guarantees and expansion.  Lincoln actually started it, and Reagan converted it into a Communist Manifesto for the Republican Party.

China pulls this same shit on its households.

Liberals couldn't admit to this fundamental error because liberals control the entitlement stream, they are useful idiots.  Solution?  Probably some sort of major bankruptcy of central government and the major states.

### GDP measures during disequilibrium

Marginal Revolution, in particular Tyler Cowen has a new book which I haven't read;
The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better
The idea is that we use up available markets to distribute with existing technology before we move on to new technology. This is an approximate synopsis I got from the comments and posting.

The information technology version, the one I accept, is different.  We enter disequilibrium when the information technology destroys old markets and makes new one.  Hence, information technology pushes us below growth potential.  The two views are reconciled if we accept that low hanging fruit is not long hanging so low when we have new information.

Information spreads across the globe and emerging economies heat up as they learn about better production technology, while our economy cools down, this has been happening since 1980.  The low hanging fruit can be packaged into production at the source, farther from our shore.

So our yields curve flattens, the gains from specialization dropping. The amount of production we owe the world has been delayed by government debt and bailouts. Unsustainability is reached when the gains from specialization cannot guarantee the promise of future production. We reorganizing to a steeped curve to make the interest payments. We move the peak production cycle to a shorter term  and  reduce consumption.  The channel become constricted by debt payments, and we have fewer options in arranging distribution with maximum variation.

So we are stuck with lower GDP until we find a new production system with higher gains.

### Tax the robots says Dean Baker

In this article on taxing the high frequency computer run trade. Taxing robots and denying them rights is OK by me, at least as a trial.

These robots, when they work, simply smooth out the half seconds between human trades.  To work properly, all traders should use them and all robots should be programmed to pick up the maximum amount of micro pennies.  The end result is a simple, fair and networked trading machine for humans.  The flash crashes we have are due to human error, humans deliberately adding bugs to the robots.

But a robot tax would be temporarily good for the economy because government would encourage their use and force them to do the drudgery we humans hate. In particular I think about the street bots.  If we allowed local government a temporary tax on these things, then all local government would legalize them straight away. I say temporary because this is new territory and I have no idea of the long term consequence.

### Interest rates, house prices and Austrians

Did low interest rates spawn too many houses? Austrians would tell us that low interest rates gave the wrong signal about the scarcity of houses, they weren't as scarce as the low interest rates would indicate.

Houses really were sparsely over produced by the nature of housing developments. The nature of housing is lack of smoothness, they are built in units of neighborhoods for economies of scale.  So the shortage of housing in one neighborhood does not indicate the impending shortage in a nearby city. Usually is it the opposite such that when on nearby city gets a new development then the next cheapest development occurs farther, on the other side of the industrial base because the current housing devlopment, by its size, would increase local land scarcity.

So housing developments partition land around the radius of the industrial center in gaps.  Nothing we do with money will help, except keepan average interest rate for housing . .  The problem is a the quantization error of economies of scale, entirely within the housing industry.  The only solution is greater efficiencies in building smaller groups of houses.  If there was an Austrian problem with housing, then it was the government involvement in housing and zoning, not the Fed's.

### Murphy on prices

But that's only because normally, a market economy "spontaneously" solves this tremendous coordination problem through prices and the corresponding signals of profit and loss. If someone had to centrally plan an entire economy from scratch, there would be all sorts of bottlenecks and waste — as the actual experience of socialism has shown.
Murphy is talking about commerce arranging machines to produce over a distributed economy.
Businessmen do not use price for coordination, they use queue length and inventory build up. We notice shortages first and raise prices second.  A good example is OPEC,  where oil producers meet and examine soil stocks around the world to determine how whether production should increase or decrease, then they set a target price.   Factories update equipment based on their improved flow and relative similarity to the previous generation of equipment, then they look at price.

Items are priced to partition the market.  he middle class car buyer skips the Mercedes show room every time, never bothering to look  If Mercedes wants to sell the middle class car it cannot do so without heavy advertising.

Murpjy says this, which is true:
Without the guidance of market prices, we wouldn't observe a smoothly functioning economy,
But he misses a point of coordination. Prices cannot do their smoothing operation absent some concept of production chains. A reductio absurdum argument here would have the buyer of a particular good looking at the price of all goods, selecting the prices he accepts, then checking to see if it is the good he wants.

This distinction between the use of production knowledge vs price knowledge explains the asymmetry of the economy. We set prices after we solve the coordination problem. A coordination problem occurs when goods become short, then all prices crash in the chain until we reestablish coordination.

## Sunday, January 23, 2011

### If the highest marginal tax were 91% would central government reduce to 17.5% of GDP?

Don Boudreqaux notices a relationship though refrains from cause and effect.  High marginal rates in 1963 accompanied low spending rates.  Low marginal rates in 2009 seem associated with something like 30% of GDP spending by Congress.

We could defeat that problem with philosophy, or we coul look and see if their is a connection between high taxes and low spending. I can see why philosophy might be preferable to analysis.

What if we choose philosophy and fail at it, then  we may get low taxes and high spending.  That makes Hayak's theories useless, they get us nowhere but the philosophy club.

The most likely cause of the relationship, by the way, is roundaboutness. Wealthy seem to think they can get additional services under the low tax, but they end up paying eventually.

### What services do we get with Don Boudreaux's flat tax?

He never says, but clearly he implies we get the minimum common government service, probably property protection of the household.

Intellectual property protection is not included, nor are the roadways in business disticts policed.  Neither are large factories and office buildings protected.  The inland household would find the Coast Guard unnecessary.

So how does the business district acquire property protection?  Self organize a special corporation, hire the service from prvate contractors.  The business district is stuck, they cannot form a separate government to provide the common business serviices, for that might incur an additional tax applied to commercial districts. The failure to tax leaves the business man at risk for theft of all sorts, his property is no longer defined.

Somethng is wrong with this formula, and we know that Don would not tax the middle class to provide special property protection for the comercial class, that would be redistribution. I could pose as Don Boudreaux on the web and he has no recourse because the median household doesn't need that service.

Why is none of this explained in Don's postings at Cafe Hayak, and we know Hayak would not have households providing government services to businesses.

### Taking up Brian's challenge on the optimum government organization

Caplan says it is free immigration and no redistribution.  That is the result I get with the emergance of minimal government principle.

Any  immigrant may go to any local society, but he pays the flat rate and receives the flat government service.  He has no destination other choice than to live under a local government formed by people of his same wealth, except  when for reasons of his own,  he may choose to live with a mismatch between services rendered and services paid. Minimal government will cause wealth banding in differing local government societies.

Do the wealthy have property right in middle class societies?  Sure do, limited to the protection provided to that middle class society, but no more.  But the middle class under minimalism would not be providing property protection for factories and office building, those owner provide their own property protection.

### Obama has no multiplier

Look at the steepness of the curve, the maturity of the Treasury debt, and the frequency of debt limit votes. His plan for more spending goes nowhere when each additional spending triggers a short term Congressional scramble to adjust current expenses.  He can't get the tax increase without threatening Dem sacrosanct programs. Congress and the Executive will be swamped with calls from one or more bankrupt states. Credit Suisse estimates up to \$320 billion in GSE (Mortgage backing government agencies) in the next two years.
World Economic Forum says we need another \$2 trillion from foreign lenders to avoid collapse of the major banks. Citigroup and BofA teeter. At this point, any significant debt increase will alert the lenders.

The likelihood that Congress an Obama can invent something productive enough, in time to save us is zero. Nor can Obama plead that we need to borrow to pay debt service.  The only role available for Obama is major structural reform.  Go ahead, blame Bush and Reagan, I do, but Obama is still stuck the mess.

### Politicians never see it coming!

Politicians Never See It Coming

“We just didn’t see it coming,” French lawmaker Francois-Michel Gonnot said of the boom. “What’s in the pipeline this year is unimaginable. Farmers were being told they could put [subsidized solar panels]  panels on hangars and get rid of their cows.”
Mish has the source.

Politicians never see the studen loan bubble, the unsustainability of Medicare, the endless problems of war, the bankruptcy of public pensions, the debt crisis in Europe, the bankruptcy of California and Illinois.  They don't see  HSR turning into a political bribe machine, they never see the under utilized  government run transit systems, the triple cost overruns of military projects, the futility of delivering electricity through government purchases, the expansion of government spending in response to income tax cuts..

The great bulk of large projects coming from delusional politicians in far away government have difficult,. unforeseen problems.