Friday, February 11, 2011

Inflation vs stage of processing by Angry Bear

Or a chart stolen from that blog

We can examine volatility in inventory using price as a proxy, and build the production yield curve that matches the economy. Crude inputs have greater volatility, and it declines going down the chain until we see smoothness at the retail level. Take the volatility measures, those variances are the yields on the generalized yield curve. Plot that against Fi, where the Fi are the minimal redundancy  Fibonacci, the prime sequence make the smoothest yield curve. That gives you a pretty good approximate yield curve. We are tring to fit a measured yield curve against the ideal. Go ahead and use least squares to find the best fit:

Ideal Generalized Yield Curve

What does the rising volatility in crude inputs tell me?  That producers likely cashed because they could not pass that volatility down the chain, gains from specialization decreased, and producers dumped a bunch of businesses. After the collapse, the businesses remaining had higher gains  from specialization.

Underneath, not readily seen, was a rank reduction over the supply chain, the polynomial defining the transaction rates dropped from F(n) to F(n-1). Hence, the new normal is less variability in products hence less GDP growth, and more hoarding.

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