Innovations in Economic Reality, Policy and Thinking

[vjp...@at.biostrategist.dot.dot.com]

We are undergoing the largest Paradigm Shift (Pinkerton 1990) in half a
millenium. It is about then that Copernicus penned the Quantity Theory of
Money, and electronic money is changing the way stuff is measured, and maybe
it has less friction. (Nondigital cashless currency: Sweden 1%, Euro 5%, USA
10%, USA distorted by foreigners holding cash abroad) Wenninger FRBNYQR 1987
showed M1 can't be measured. Partland FRBNYQR 1992 showed M2 can't be
measured. So Greenspan was called "Broad Money Al" (M3) in 1993 Economist
caption before turning to pegging fed funds rate. But Sargent Wallace JPE
1975 showed pegging rates is destabilising. Further we do not know the
functional relation between real or natural and nominal rates. Therefore the
transformation may introduce imaginary numbers and harmonic velocity which
would explain Haugen's continued high volatility during the Great Depression
(ie, it was the higher order moments that were really messed up, not just the
obvious lower ones - correlations all flip to one under stress and the whole
thing goes and stays nuts). Once the Kagan exponential velocity goes into
the zero range, it's trapped. And who knows what the real rate in the
exponent really is, maybe it produces harmonics. So if we go back to Sargent
Wallace 1975 saying pegging rates is destabilising, I think there is a window
when they aren't, between 2% and 6%. Above it becomes a strange detractor of
hyperinflation. Below it goes into the strange attractor of liquidity trap or
secular stagnation (ZIRP and negative rates concealed as exorbitant bank
fees). (Mundell, Monetary Theory, 1971, pp. 66-73, esp fig 7-1) So therefore
I would never allow rates out of the 2-6 window, instead use things like QE
(13-3;Joseph & Pharoah were the original RFC/RTC/TARP) below. But beware
Plossser prefers slight deflation. Recently I have heard anecdotal evidence
Velocity can't be measured. And how did we measure Y (GDP) before Keyenes,
anyway? Perhaps a separation of variables is needed, maybe find a way to
tease out population from income (GDP/capita times population), maybe treat
supply times velocity (MV) as a single quantity. The Taylor rule is but the
logarithmic derivative (elasticity) of the Quantity Theory constrained by the
FRA 1913 requirement of elastic currency. I have been experimenting with
Cornell Eureqa with which I got Y= 8.6E10 + 1.4 C - .13 (I*C) and and SDE d
(ln (y)) = (5/7) sin (d ln (m2)) to combine with dy= (2/5) I + (13/3) dy, an
SDE from the Klein model. I would like to use Feynman Kac to turn this into a
PDE, perhaps Continuum Field Economics. In the mid90s, about when Fourth
Turning came out, Greenspan began worrying about deflation and brought in Ben
Bernancke who worked with Vincent Reinhart (AER 2004) developed ZIRP/QE in
case we become like Japan: GM, A&P and Greece all went bankrupt because of
pensions (abortion); Bear Stearns went broke the day the first boomer
retired.

Electronic money (bitcoin, etherium, &c) is the future universal
currency. Those who argue gold is the opposite of fiat money forget someone
has to peg gold, which makes it fiat, too. A quarter century at NYC's
Harvard Club, I got Andy Spindler to concur that moving regulation to the
Treasury OCC would eliminate the conflict of interest that inspires
conspiracy theories. The OCC has its roots in the 1792 Controller of the
Treaury, which included Call Reports from the beginning but evolved into the
OCC by the time Lincoln renamed it. While I do not think an absolute gold
standard is what it is claimed to be, I do support a universal currency, a la
Bretton Woods. Further I do believe the Fed Reserve should look at gold and
petroleum prices. In exchange for moving all bank, securities and insurance
regulation to the OCC, I would give foreign exchange (as long as we don't
have fixed exchange) and the Strategic Petroleum Reserve to the Fed Reserve.
Osama wanted to break us with $144 oil and almost did in 2008, and this was
caused in part by Dubya dropping the dollar to encourage exports, so FX
should be part of the Fed Reserve policy envelope.

Financial panics resemble epidemics and blackouts both in terms of
contagion and interconnectedness. Like power, it is the grid which makes
finance work. A quantitative rule is a lot harder to waive the way the
Volcker Rule or Glass-Steagal can be. To appreciate the quixotic nature of
the Volcker Rule, recall banks were first convinced to sell securities by the
government wishing to sell its own bonds a century ago. In 1902 OCC banned
banks selling corporate securities but chose not to block National City from
using a subsidiary in 1911, then in WW1 encouraged banks to sell government
bonds. (Broome& Markham 2001 p731& 747) Enron masked phantom profits by
claiming to reinvest them instead of paying dividends. In 2008 mortgage risk
was masked from Basel ratios by stripping. THis suggests that Basel can only
be effective if part of the reserve capital is placed with the Fed. But at
the same time, deposit insurance also creates a moral hazard by promising to
rescue bad behavior. Instead of a waivable binary Volcker Rule, they should
use a Taylor-like Rule that changes Basel Capital Ratios with leverage
squared, volatility and inversely GNP (the SDE is (L-1) dr + L d var - d ln
y) I would use Basel ratios across the board on banking, finance, insurance,
and make them hold it as interest-bearing excess reserves at FRB to avoid
phantoms (like pre-Hubbard-dividend retained earns). Capital ratios are
self-insurance, hence lack the moral hazard of deposit insurance.

Social savings accounts should replace entitlements (retirement, health,
education, housing). As Enron, Bear Stearns, GM and Chrysler pensions
vanished, these should be jointly monitored by individual, employer and
government. As major transactions are delayable and deliberate and tax
assessors never mark to market, it is better to use indifference prices than
marking to market. When an individual has fulifilled obligations to social
savings, may be considered "accredited" investor.


--
Vasos Panagiotopoulos, Columbia'81+, Reagan, Mozart, Pindus
blog: panix.com/~vjp2/ruminatn.htm - = - web: panix.com/~vjp2/vasos.htm
facebook.com/vasjpan2 - linkedin.com/in/vasjpan02 - biostrategist.com
---{Nothing herein constitutes advice. Everything fully disclaimed.}---