Theft is a strong word. It requires two things, desire and a lack of consent. One party desires something from another and takes it without their consent. Simple. My current project is developing an understanding of macroeconomics based on a formal aggregation of microeconomics. I did not anticipate the understanding that I found. This last weekend I worked on understanding claims against wealth inequality. I began by looking at the distribution of income derived form the Average Wage Index (AWI) from 1990-2012. Plotted on a Log-Log scale the distribution appeared to follow a canonical distribution Figure 1.
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
Russell Brand made an audacious call for revolution in his New Statesman editorial. I share many of his concerns for the current state of affairs and see that if unchecked we will unfortunately have a revolution. However, I do not see his proposed solution as an effective one. It will lead to a greater tragedy within any society that adopts his well intentioned action. His interview with Jeremy Paxman is informative and entertaining to watch.
In this post I want to introduce some thoughts on why the actions of the Federal Reserve are distortionary, why the creation of money within the shadow banking system is more organic, and propose a more formal definition of inflation or deflation of the money supply.
Milton Friedman identified that the point of introduction of money into the economy benefited the person who introduced it the most, with its effect lowering as it spread further into the economy. Here the money being introduced isn’t aware of the overall size of the economy. It thinks based off of its one interaction that I am worth such and such and as it interacts more and more with the larger economy it begins to poses more information about the action that it can induce. 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
Recent news reports heralding higher natural gas prices at 19-month highs (Bloomberg) due to cold weather (Reuters) and diminished inventories (even reports of the shale boom ending CSM) piqued my interest. There is hope that natural gas futures are bright (Forth Worth Star Telegram). I wanted to check these narratives against some of my models.
Estimating the marginal utility of money plagues my understanding of economics and greatly affects my ability to model it. However, I developed an alternative deflator called the Energy Price Index (EPI). I took historical Energy Information Agency (EIA) data and performed a regression of the data against the price of oil and natural gas for each fuel source, and then aggregated them based on fraction of total primary energy consumption to get the average price of primary energy delivered to the economy. I tied this model then to the daily WTI crude oil prices and the Henry Hub spot market. Here is an early attempt trying to describe this Economics for Engineers. This model has several problems first it ignores technological change in the conversion of energy to useful work, it assumes that the distribution between energy and non energy feedstocks is fixed, and it uses an adiabatic model of the US economy. The last assumption only affects the estimation of wealth, I perform a more rigorous derivation of the price and money relationships in The Effect of Price in Macroeconomics and have not had time to rebuild my models based on this work. The other two assumptions are a function of my own ignorance. Ayers and Warr estimate the necessary information to fix this error. Continue reading