Wednesday, August 18, 2010

QM Theory and economic change

I am starting with this chart reposted in Mark Thoma's blog.  The first question is why is growth constant at trend?
 
We always measure the same growth trend, regardless of underlying technology. This graph is a comparison of a very lightweight good (money and debt) to the heavy weight goods. It will always look the same in terms of trend, unchanging.We can do nothing else, our precision is a fixed biological constant. So we will always organize our distribution networks such that each node in the distribution has the same fixed variation in inventory levels.The economy operates with a fixed Signal to Noise ratio.
 
Then the question becomes, How does this chart relate to a common theme of mine, the relationship between information technology and transportation technology.

When information technology explodes, the Y axis of the chart causes the sudden downturn as the economy is disrupted by the sudden appearance of $20 bills on the sidewalk.When transportation technology explodes, the X axis is disrupted by the sudden ability to move heavy goods to better locations.

The first effect causes actual GDP to drop below potential, and the second causes actual GDP to rise above potential.

Since 1820, all depressions follow the same path:  Information technology explodes on the scene then transportation technology adapts.


But the X axis is time!
Yes, the transactions rates slow down during the downturn.  We are seeing a strain on the transportation grid.  John Taylor at Stanford gets this part.

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