Saturday, September 19, 2009

Missing element of Economic Models

A piece I was sent, "The Quiet Coup"  by Simon Johnson in The Atlantic:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

I think it goes much deeper, I'm much less optimistic.

Summary: Henry Ford got it right when he consciously decided to pay his workers enough to afford his products. Forgetting this is Arrogance & Hubris.

The way we're heading, there is a real chance we won't just muddle through.
My scenario is the huge US Government debt causes the collapse of the US dollar causing rampant inflation there & elsewhere and the Chinese needing to break lose.

At which point, the Australian dollar, currently tied to the Chinese economy, goes into free-fall.
I don't know the timeframe.

Solutions without knowing the Root Cause?

Friends have talked to me about "Economists" and the apparent lack of solid Economic Theory.

I think a root cause is they, academic economists, don't understand what Money is.
Which means they don't model it well or properly, either statically or dynamically.

What's the impact of 'frictionless' trading with instantaneous communications, automatic trading systems and single global market? As a side effect of a single global market, I would've thought that arbitrage would be impossible with the lack of secondary or distant markets.

Frictionless, automatic trading results in infinite amounts of cash flowing infinitely quickly.
A really, really Bad Idea.

Only this is not monopoly money. It's Real Life with Real consequences.

Burning Other Peoples Money (OPM) to the ground will get even the most self-satisfied, complacent & apathetic electorate out and manning the barricades...
Or not - I get this sort of thing wrong more often than not.

Lack of Accountability or does effective control require Skin in the Game?

There's a common problem underlying CEO & Director Salaries and Financial Planners/Advisers:
  • There's wildly asymmetrical personal upside & downside.
    In fact a complete lack of downside.
    There is an inherent structural bias in the system.
    The feedback effects when control and assets are conjoint are missing.
Couple this with "Institutional Investors" and compulsory savings (Superannuation, 401(k), Pensions, ...)

All us worker drones are forced to pool our money (Anonymous Capital) husbanded by these Institutional Investors, but don't get a say in what they do or how they influence those big companies, directors and CEO's... That at least half of us work for.

"No Taxation without Representation"? might now be:

"No Investment without Responsibility"?

The Limits of Taxation

Where are Governments going with Tax?
How much of GDP will they

C. Northcote Parkinson made a bunch of Postulates in the 1950's & 60's:'s_Law

Notably, Parkinson postulated:
  • Work expands to fill the time available.
  • Expenditures rise to meet income.

Which nicely explains the on-going ratcheting up of Tax rates and Government Expenditure.

But what's the Limit? Where does it end?
Governments cannot tax more than 100% of GDP, in fact a lot less..

What are the Optimal Tax Rates under certain operating conditions & assumptions??

Too little Government investment in infrastructure, or "Common Wealth", and Commercial Output declines.

Too much taxation and available Customer Expenditure and Saved Capital declines, starving Enterprises of funds, reducing growth and leading to reduced tax collections.

That modelling should be a priority of Governments, Political Parties and Economists in every Democracy (and other type of Government).

The systemic and long-running misallocation of resources caused the implosion or collapse of the USSR.

No Country is immune - large, small, new, old, Democratic or not...
For more than half a century, the U.S.A. has been the global economic standard and its currency the defacto Global Standard - replacing the Gold Standard before.
But this is nothing written in stone to say it will always be thus.

Rather, these things do not stand still.
Just as "The Sun never set on the British Empire" in the Nineteenth Century and the British Pound reigned supreme, within 50 years the Empire was gone and Britian broke after World War II.

Maybe Parkinson predicted the current situation in 1960, or at least he foreshadowed it, as demonstrated in this review of his work:
INJELITANCE: A vital Parkinson contribution was his diagnosis of why certain organizations suddenly deteriorate: the rise to authority of individuals with unusually high combinations of incompetence and jealousy ("injelitance").
Perhaps permanent solutions to cyclic Economic Crises lies in better understanding backed by good Governance, rather than more regulation.

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