Kling, Recalculation and the Great Depression

I generally like the Recalculation story by Kling.

I think Incompleteness does provide a context to fit his story in detail. By incompleteness I mean that the economy is deliberately imprecise because of the cost of precision. It is very expensive to track all the possible mis-allocations, or find all the profit opportunities. Hence, over time, the economy has adapted to a boom bust cycle as the least cost alternative.

Second comment I have is the details of the Great Depression. Kling comments:

"The amount of economic realignment caused by the internal combustion engine ultimately was huge. "

Then goes on to comment:

"A source of the current Recalculation is the Internet. "

He is close, but I wish he would have commented on the advent of broadcast based commercial markets in the late 20s. Like the Internet, broadcast radio changed the utility of freight transportation so greatly, so suddenly, with much more efficient advertising.

We await the spiritual raising by Justice Roberts

Justice Roberts, in an amazing extension of rights, wants to grant artificial persons fundamental legal rights in the case of Citizens United vs Federal Government. Why he took the case, or why he didn't remand it back to contracts court is beyond me.

It would take a tremendously ignorant law professor to accept that somewhere in the Constitution that artificial beings have rights. Anybody know of a tremendously ignorant law professor?

My home town has half of residences underwater

GoBiz has the latest numbers from Corelogic on underwater mortgages. My hometown, Fresno, CA,has 48% of residences underwater. My hometown is also the center of Public Union mafia control of government in central valley. This post shows our city approaching bankruptcy after years of handing out future goodies.

What is the outcome of the pension tsunami in Fresno? Ultimately it is bankruptcy and restructuring. Our new mayor is dealing with a city council that basically reports to the union head, especially the police union. Our citizens are wondering which crime is the least painful, street crime or city boardroom crime.

Obama may well delay the restructuring with a bailout, but he just ensures another Double Dip. One thing we can all count on, the Pension Tsunami is unaffordable by the federales or the locals.

Zero Hedge is doing its job.

Using forensic accounting they have trapped the FDIC in an insider trading scandal, which Mary Shapiro at SEC will cover-up.

Tyler Cowen on Health Care

He makes a very strong data case that Medicare costs have never been under control, in spite of bad reports cited by Yglesias. What we have is wishful thinking on the part of progressives and realism on the part of investors, the result will be a severe inflation/deflation cycle, a Double Dip.

Romer worries about a repeat of the 1937 change in circumstance. That second dip came in 1937 becaue government changed its product mix substantially, switchin to wartime production. Healthcare reform will look like a Double Dip trigger when we are done. Something which was not a current constraint in the economy, now becomes one.

What you need to know about Climategate

The fundamental we are dealing with is that the earth is in the Holocene period, has been for 12,000 years or so. That is the hottest period in the glacial cycle, but the length of the Holocene may be abnormal, and related to biosphere effects, a change in CO2 some 12,000 years ago. We are at the change over period in the glacial cycle. That period is generally very rapid, a collapse in temperature, meaning it is a tipping point to rapid cool down.

With the CO2, then, where do we tip? Dunno, really, because we have never dwelled the top of the glacial cycle with so much CO2, not in a million years. I can think of scenarios and minimizing constraints that might put us back to ice ball. The danger is precisely because we are doing this at the top of the hottest period, why? Is there some natural reason? If so, on what basis says that the ratio of tipping points go in one or the other? Did we do anything 12,000 year ago, what are we doing now, and what was evolution's intent regarding our relationship to the glacial cycle?

But, bottom line, the mix of CO2 with the tipping point combined with the length of Holocene will cause unexpected events.

Looking at the right side of yield

When we last left the subject, the relationship between economic yield and Fourier, I said, a yield curve, as a spectrum, will be DC (zero centered) normally distributed, the time series is zero centered gausian noise, at equilibrium. I mentioned the negative terms in Fourier, they were hidden terms in the economy.

We should use Fourier sign convention, and the right side of the yield curve are negative value going up. So, the yield at infinity, zero frequency, has positive yield on the left and negative yield on the right. The normal distribution is symmetrical with growth and decay processes.

But, the right side of the published economic yields is vacant, unknown. They can be recovered in hindsight with forensics, or recovered in real time by the likes of Zero Hedge and are observed in revision histories. The right side terms are held within the firm and are accounted for by command and control of internal inventory flows. The right side terms may include fraud, or potential stimulus actions by a monopoly.

The economy is risk averse, so it operates its aggregate yield curve to the left, such that the tail risk, the right side of yield, is small. We want slightly more growth processes than decay processes. But that puts the center of yield at or near 20 year, so we are Gaussian about a cycle because we are overly cautious. However, because of quantum affects we only measure yield from its peak to zero as a straight line, so it is not clear where the peak of yield actually lies.

Summary. We are cautious. We over produce to keep stockpiles high. As time flies, the reserves losses do not occur, so the reserves are moved from the right to the left in profit taking, the curve obviously peaks at the 20 term, the portion in the right dwindles, we relax, deflate and shift economies of scale for a while.

The theory tells us exactly when a deflation is going to occur, when the peak is noticeably at the 20 year point, for that means we get it, the past had been saved.

Felix Salmon and Political Science!

HT Marginal Revolution

Felix wants to mix economics and politics:

"Given the government’s insatiable appetite for cash, it’s only natural that it would prefer to tax plutocrats, spending some of that money on poorer Americans, rather than move to a world where poorer Americans earn more (but still don’t pay that much in taxes), and the plutocrats earn less, depriving the national fisc of untold billions in revenue."

The equilibrium is here in what Felix says, the balance between smaller government and progressive taxes. The problem, once again, is the lack of precision, we can never get that close to the equilibrium.

By the way:
fisc n. The treasury of a kingdom or state.

Felix taught me a new word, I can still learn!

The Fed Target: Interest rates, NGDP, Base Money?

That is the discussion among the banking economists at the moment. Kling, Sumner, etc. In short, which variable should the Fed watch when setting monetary policy, Nominal (non-inflation adjusted) GDP, real short term interest rates, or the money base in circulation. I propose here that the discussion resolves around the response time of the Fed, not the target.

We are really talking about the TIPs aberration in the chart above. As I pointed out, this aberration is the result of the economy changing faster than the adaption period of the Fed. There is a six month bandwidth limit in the financial system, it cannot be avoided regardless of the targeting regime.

Even George Selgin's competitive monetary system would only smooth out the pulse, but the delay remains.

Why do we have a six month noise limit in aggregate measurements? Because the cost of adding more bandwidth is enormous. How enormous? Look at the cost of our central bank in dealing with the crisis in late 2008. The central bank and Treasury were in the headlines many days, high level visible meetings all day among officials in Washington. We simply cannot afford the cost of collecting aggregate information with timelines less than six months.

Information theory gives us a clue. If finance operates with 5 bits of precision, and suddenly needs 6 bits, then the number of transactions the finance needs goes from 5Log(5) to 6log(6). As long as the economy is operating within a stable "corridor" we will want the Fed operating with low precision, and we are willing to suffer the consequences when change happens too fast.

Measuring GDP in a constrained environment

Comparing Real GDP to Oil Imports

Under the assumption that oil, or energy, is the dominant constraint in the economy, we would expect the oil yield curve to best represent the average yield curve of the economy. So, I am looking for correlations between oil imports and GDP. Note the Real GDP in the lower chart, from 1992 to today. Compare it with the oil import chart. They both have the inverted hockey stick. In typical asymmetry, oil declines faster than it rose.

What is causality here? Real GDP will be decomposed mostly by the top few constraints in the economy. that is there is only so much regression coefficient to be distributed. Most of that correlation coefficient is oil imports when oil is excessively constraining.

I think a look at the last portion of the oil import chart will show a small correlation between oil imports and the American Recovery Act. There was a typical, temporary excess of oil inventory after the crash. Congress managed to use it up.