There has been some discussion in the news about inflation. Japan is actively pursuing inflationary policy with the Yen. The Federal Reserve is not backing off of its Quantitative Easing, taper-off. Meanwhile, India is is watching their currency collapse. And the ECB just announced a surprise lowering of their interest rates. One of the hallmarks of modern economic theory is the stimulatory nature of increasing consumption now. This is financed through two mechanisms, debt and increasing the monetary base. The root of the dual mandate of the Federal Reserve is that inflation as shown by the Phillips Curve causes higher employment. This is dangerous policy. Here is the math explaining why. Continue reading
I read a Zero Hedge article on the price of gold and the removal of gold form bullion banks. What was not made very clear in that article was why there is a depression in the price of gold along with increased demand. Using a statistical economic framework, I think there is a correlation. First, I need to begin by borrowing from Hayek’s theories on money. The key point here is that private money created is indistinguishable from specie or reserve notes issued by a central banks. This is a cornerstone of the fractional reserve banking system. I don’t even really want to call it that name, because the phenomena is not necessarily a construct of man, but rather man’s response to statistical economic laws.
We create money as a means of exchanging action–utility. This money that is created has its value determined through exchange. In a sense the money introduced becomes aware of the economy and the economy becomes aware of the money. This can be represented in a statistical economic sense using Langevin diffusion. This is a method of stochastic sampling, like what is used in methods of numerical quadrature, such as Markov Chain Monte Carlo. In the economy, certain individuals collect some of this money as a society begins to accumulate wealth, we call them bankers. Continue reading