QM Theory and the Output Gap

Kling cleans up the discussion on Output Gap started by Ray Altig. Related to Kling's recalculation problem QM Theory can offer some paths toward limiting the wide variation.

I start with the basic assumption of constant uncertainty. The economy stabilizes when all production sectors stabilize about a similar level of measurement uncertainty, which I take to be biologically determined. Then we go the yield curve which, by orthogonal projection, must have term points separated from each other to minimize total uncertainty, each term point maintaining the constant uncertainty.

Let us apply that. Currently the yield curve still maintains the steepness from the ten year term down to the overnight term. Using the queuing model, which Frank Shostak hints at in the Mises blog, combine that with the King recalculation problem and I conclude that we have not yet figured out how to move 10- 30 year production decisions into shorter term retail delivery. We are still calculating.

So, how do we know whether technology will regress to a deflated yield curve or return to the inflated yield curve? Will short term rates go up or long term rates go down? I will return later and leave the reader in suspense for now, but the key to understanding should be related to Uncle Milt's snap back theorem.

Let me make a Grand Assumption which economists can dispute, but which does simplify the discussion. My assumption is that the modern restructurings, or recalculations result from technology advances so that we can eliminate the Malthusian problem of limited inputs. Under this assumption, the economy has suffered the partial application of technology and awaits the acceptance of the complete application of technology. That is, I am back to DeLong's electrical revolution starting in early 1800.

I restate the pattern. Technology first moves information about goods, then goods use the same technology to widen the information path to include goods delivery. It is a specific pattern related to the three modern depressions, the Long in 1870, the Great in 1930, and the Mini today. These are specific kinds of depressions, unique and largely unrelated to other recessions in the modern times. Technology will meet the challenge, and the economy will return to its standard rank, the yield curve, and the finite set of points on the yield curve will return to nominal.