Thinking about Evolution & Economics and Some Notes on the Natural Selection of Ideas 

Part 15 - Creating Money out of Nothing - 

Evolutionary Economics & Complex Adaptive Systems

Understanding Modern Monetary Theory - an alternative to Economic Growth?

 

God said and we agree with him - Matthew 25:29 -

'For to every one who has more will be given, and he will have abundance; but from him who has not, even what he has will be taken away'.  

God also said and we agree with him - Timothy 6:10 -

Money is the root of all evil

Once upon a time a mere mortal uttered something like -

Economic growth depends upon hard work, honesty & thrift, the defence of excellence against the ceaseless attacks of the envious bureaucrats, the eradicators of excellence and the midwifes of the second-rate!

Elton Musk uttered something similar a generation or so later -

Senators basing their schemes & scams on the confiscation of other peoples money will soon run out of cash. The punters don't like it! 

... and lovely folk in rural Mouldsworth confronted the local squire with verbal pikels - 

He's only screwing us to make his dirty profit !

Aristotle suggested - money was an abstraction, a conventional fiction which must retain coherence and consistency through time and space to be useful as 'sound' not 'easy'.

John Locke suggested - money was a fixed and immutable global gold standard. 

Marx suggested - money should be abolished and rely on love

Keynes suggested - liberal, democratic states and the hand on the money tiller and beware of the evaporation of trust.

We had many attempts at money ... at least 5 -  

1. We met Adam the Smith on Gilmore Hill and watched his pioneering work in his forge, who contrary to popular belief never ever suggested folk were greedy parasites & profiteers ... taxes were necessary for many 'public' goodies ... but there were always taboos -

never spend hard earned savings on crap the customers didn't like it

as soon as there were stocks there were always thieves   

2. We tried to teach about the foibles and vagaries of money in The Wealth Machine underneath the soap pans in Apapa.

3. We also wrestled with the Strange History of Money at the Open University   

4. But in the end we reckoned the history of money was best written by Niall Ferguson a Harvard Prof - The Ascent of Money ... there was no requirement for repetition although many others with a axe had a go !

5. At the OU we also met up with Maynard Keyes who, contrary to popular belief, never ever suggested bills shouldn't be paid and balances shouldn't balance ... nevertheless Keynes was always called in to justify the big spend ... which always seemed to transmogrify into the big print when the confiscation of rainy day funds never covered the cost of the waste & fantastical pipe dreams ... commonly called bureaucratic kludge ...

The Economic Consequences of Peace by John Maynard Keynes, 1919 ... worth a read? -

Lenin was certainly right - the best way to destroy the capitalist system was to debauch the currency.
Inflation - governments secretly, arbitrarily & unobserved, confiscate the wealth of their citizens ... impoverishing many, enriching some ... a rearrangement of riches strikes at security and confidence in the equity.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'Profiteers' and become the object of the hatred for the impoverished bourgeoisie.
Real value of currency fluctuates wildly, relations between debtors & creditors, become utterly disordered & meaningless as wealth-getting degenerates into a gamble & a lottery. A process which not one man in a million is able to diagnose.
Governments of Europe seek to direct on to 'profiteers' the popular indignation against the more obvious consequences of their vicious, weak & incompetent methods.
'Profiteers' the entrepreneurs, the active & constructive elements get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits.
By directing hatred against this class, the European governments further the fatal process.
The profiteers are a consequence and not a cause of rising prices.
Incompetent governments, unable or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.
These currencies enjoy a precarious value abroad, they have never entirely lost their purchasing power at home. A sentiment of trust in the legal money of the state is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. They do not apprehend that the real wealth, which this money might have stood for has been dissipated once and for all.
Governments endeavor to control internal prices by the force of law, and preserve some purchasing power, spurious value, for their legal tender. But if a man is compelled to exchange the fruits of his labors for paper which he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors, or relax his efforts in producing it ... leading to the waste and inefficiency of barter. The worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer.
The effect on foreign trade of PRICE_REGULATION and PROFITEER_HUNTING as cures for inflation is even worse. Currency must soon reach its real level abroad, with the result that prices inside and outside the country lose their normal adjustment.
The price of imported commodities, when converted at the current rate of exchange, is far in excess of the local price, so that many essential goods will not be imported at all by private agency, and must be provided by the government, which, in re-selling the goods below cost price, plunges thereby a little further into insolvency....
It is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value....
It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short-period credit in terms of sterling or dollars, may be reluctant and doubtful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce....
Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight....

In desperation we attempted to rise above the fray and get back to basics in The Case for Business ... as an Evolutionary Economist?

We failed miserably ... money maintained a stubbornly elevated position in the hierarchy of folks needs. wishes & desires ...

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Money was the root of all evil ? ... but then evil existed a long time before money?    

Many said, 'money was the root of all evil' and most folk knew what they meant ... money talked ... but few folk had the time to think about the strange history of money ... and the history of evil wasn't strange at all as perfidious Albion was schoolboy stuff ... and only one or two folk ruminated on 'Modern Monetary Theory' ... it all sounded a bit arcane and even bumptious.  

Since we graduated a new generation of scholars were been busy crossing the beams of economics, political philosophy and legal studies. Money was getting a bad name and there was value to be had from an actively managed domestic currency, flexibly responding to changing economic conditions?

   If creating money out of nothing was now 'on' it seemed to us that creating value always required hard work, honesty & thrift, the 2nd Law saw to that? 

We had learned underneath the soap pans in Apapa about balancing business Balance Sheets and even before that we had wrestled with balancing our household accounts, especially when we realised the kids had a voracious appetite for cash and we almost instinctively tried to save for a rainy day. We guessed hard work, honesty & thrift really did build some innovations & new wealth which helped to pay the bills and save Unilever from bankruptcy? ... and perhaps this whole shebang & caboodle was growing as entropy relentlessly increased?

The momentous learning underneath the soap pans in Apapa was the responsibility/obligation/conscience & love involved in protecting the family & saving for the inevitable rainy day? We joined Unilever and stayed with Unilever because of opportunities and a defined benefit pension scheme which was second to none! This was not luck this was rational survival sense. Of course as our rainy day fund compounded with helpful tax relief the evil parasites & predators in government bureaucracies soon started to confiscate the goodies under the guise over providing safety for helpless pensioners. With ample evidence to the contrary the bureaucratic mantra was -

  'equities were too risky, government was safe'

 An avalanche of regulation followed this falsehood as the well established political cycle of spend, tax, borrow & print ... as 'safety' demanded financing government borrowing and their lethal debt.

In 2006 Defined Benefit Pensions were 61% invested in equities, in 2022 it was eroded down to 19% ...     

Amongst the sweat & grime of those leaking soap pans we gathered the evidence ... command & control from above was not an alternative to chaos, more often it seemed to create the chaos! ... Darwin's entangled bank, with no mortal designer produced miraculous local order ... hard work, by the thermodynamic definition of work, produced order & value; survival value or 'know how' ... against all the odds ... 'there was no free lunch' ... 'you get f--- all for nowt' ... all the bills had to be paid ... and the cost of our new factory at Aba was real real expensive ... but how to measure 'value'?

We were perplexed & worried something rotten about why Brussels, Westminster & Washington never had to balance their Balance Sheets ... why? How did they get away with it? 

Then by 2016 Democracy itself was broken and in danger of destruction as one dictator after another generated hatred as they tried to get their smutty mitts on money by an endlessly practised process of - tax, borrow & print. But the crock of gold at the end of the rainbow was elusive ... a ephemeral figment of deluded imaginations.

Was all this an ingenious effort to outwit evolutionary economics and create wealth out of nothing. As the next election loomed the arrogant celebrations proved a tad premature - 'Ding Dong  the witch is dead' - 'Mission Accomplished' - 'Impeach' - 'Filthy Lucre' ... but the juggernaut relentlessly continued ... money had a bad name.

With a bit of effort we could concoct a 'flow of funds' in our imaginations but ... where, when, how & who could detect by ... seeing, hearing, tasting, smelling or feeling the ... speed, distance, direction & timing of any movements ... especially when the whole shebang & caboodle was immersed in complexity, change, conflict & scarcity?    

On the shores of Lake Malawi in 1977 Dick Stevens opened metaphorical eyes to Adam the Smith's notion of 'moral sentiments' ... the reality of empathy and a flow of promises ... a promise made and a price paid ... but this whole shebang & caboodle had to balance? Pacioli saw to that?

But how do we measure such 'value' figments? ... and can you own a promise? We knew such figments actually really really existed ... we remembered our vows in Norley in 1965 ... and we knew for sure who made and owned such figments ... but ... and it was a big but ... we also new for certain about broken promises ... everybody knew about them. And ... we had also leaned a bit about the 2nd Law of Thermodynamics and how happenings never ever 'balanced' 'cos entropy always increased & flowed in one direction? But ... and it was another big but ... the flow of entropy created opportunities for hard work and local order.

But in our funds flow statement the only mention of 'surplus for investment' or 'profit' was the yellow arrow flowing one way to the Government!    

Wot on earth was going on? For sure something else was going on that wasn't in the picture?

The flow of funds certainly looked like it was an evolved complex adaptive system of natural selections which outcomed survival value ... economic growth from synergies of specialisation & scale ... a two way balance of trust ... productive empathy. But trust was painstakingly built up but easily destroyed when the red dictates raised their ugly heads and all semblance of balance collapsed?

We suspected the rumble of thunder we heard when MMT was mentioned was Pacioli was turning in his grave as the house of cards collapsed?

It was all very difficult for us 'cos we learned from Charlie Darwin. He explained that outcomes came from bottom up physics, chemistry & biology and the arms race which was pitched against the top down poisons, parasites & predators who always tried to manipulate the system to thieve stocks ... and unbalance the balances.

Wot a mucky mess!

Evolutionary Economists reckoned the last time they looked happenings were a tad more complicated than a concoction and were a bit discombobulated and miffed.

Wot about complexity, change, conflict & scarcity?

Perhaps, just perhaps, money evolved as a measurement system, which balanced the books and paid the bills - but it was not money that everyone wanted remember Weimar Germany and Zimbabwe were never short of money ... they had it by the barrow load.   

It was 'value' that everyone wanted to get their hands on ... and value was 'know how'! 

Command & Control of Complex Adaptive Systems was looking like impossible -

Perversity - unintended consequences emerged happenings were not cause & effect  

Jeopardy - evolved liberal democracy and competitive innovative businesses were distorted & destroyed   

Futility - Darwinian evolution was an outcome of the Laws of Nature whic made selection natural not intentional

the rebuttals were insistent -

Evolution too slow -- but others said the diversity of creative imaginations sped up the trial & error process of learning   

Revolution was necessary -- but others said synergies came from cooperation 

History of intelligent design was obvious in Rev Paley's watch -- but others said the watch maker was blind and the dice were loaded by moral sentiments & trust  

So we started again ... from mathematics ...

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Mathematics was the root of everything ? ... but then maths existed a long time before discovery?  

Why was mathematics the universal measurement system? Why did mathematics describe physical happenings?

G L S Shackle, Potential Surprise Theory -

'we are ignorant of what it is we do not know, even though we know more than we can ever say'.

Frank Knight (1885–1972) University of Chicago distinguished between risk and uncertainty -

quantifiable risk (resolvable) observation data, statistical noise, confidence levels, probability distributions

uncertain uncertainty (radical) no quantifiable knowledge about some possible happenings (constrained only by the laws of nature) recognising some fundamental ignorance, a limit to knowledge, and an essential unpredictability of future events, where effects were causes, and outcomes emerged.

'uncertainty was radically distinct from the familiar notion of risk, from which it had never been properly separated'.

'The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.... It will appear that a measurable uncertainty, or 'risk' proper is so far different from an immeasurable one that it is not in effect an uncertainty at all. We have to adapt and overcome, that's all we can do'.

Linear became non-linear as -

 everything affected everything else and

 effects were causes

... the equations had no solutions but, infuriatingly, unforeseen patterns emerged ... life on Darwin's entangle bank was exquisitely ordered, it was not random chaos.

There was a different impact on human behavior / decision making.

Faced with uncertain uncertainty managers invested for quantifiable risk & return but entrepreneurs invested to discover economic profits? 

Focus was on how uncertainty generated imperfect market structures and explained actual profits.

Darwin's insight of weeding out failures by trial & error required the diversity of random mutations but it required differential survival to explain the 'entangled bank'. We only saw the survivors, the failures were long gone.

It was natural selection which explained the patterns of order emerging out of low entropy ... there was complexity ... change ... conflict ... scarcity ... and some strange stability ... emerging from the mathematical Laws of Nature -

 2nd Law of Thermodynamics in an expanding universe created diversity

 Pauli's Exclusion Principle 

 golden ratios & Fibonacci & fractals

 exponential growth & compound interest & DNA mutations 'e'

... how many more?

Michael Brooks had a go at pinning down the unknowns with his history of mathematics and the discovery & accumulation of know how - Arithmetic - Geometry - Algebra - Calculus - Logarithms - Imaginary Numbers - Statistics - Information Theory ...

 Unknown Unknowns ? - Known Knowns ... Known Unknowns ... Unknown Unknowns ... Unknown Knowns? 

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Money - The Measurement System for Value   

Money didn't count, output per hour of hard work counted!

Money evolved as -

medium of exchange

unit of account

store of value

transferable debt

But Minsky moments were always instant flip flops in the brain ... flip flops between excitement & fear ... remember Long Term Capital Management who found instantly that there was no market and no buyers ...

Real money, the real McCoy, was our tool for measuring, storing and exchanging our very own perception of value.

Elijah McCoy was born free in Canada on 2 May 2 1844. His parents were former slaves. They escaped from the America to Canada. In Canada they discovered real freedom.
When Elijah was three the family moved back to the US and discovered opportunity. 
Elijah was passionate about mechanical devices and developed a special talent with tools and machines.
At fifteen, his parents sent him to Scotland to study mechanical engineering where he built on the legacy of Jimmy Watt and learned everything there was to know about thermodynamic engines. 
After he graduated in Scotland, he sailed back to an American Dream.
But in the United States, the only job Elijah he could find was shoveling coal into fireboxes on the Michigan Central Railroad.
Undaunted, he picked himself up, dusted down and went on to invent a means of lubricating the steam engine while the train was running and super-charged transportation around the world.
That's the Real McCoy!

So why lethal debt? Our gran used to say -

'neither lender nor a borrower be' and  

'honesty was the best policy'

and we knew why ... but why was it so difficult to speed up the learning of grand children? The Story of the Clockwork Rabbit.

The nature of value was a whole can of worms or was it a Pandoras Box ... this 'perceptions' malarkey was real difficult as it seemed to depend on different worms in the heads of different folk, at different times, in different places, interacting with different others.

A global balancing act with no orchestrating designer? Give me a break!

The Nature of Value - Hard Work, Honesty & Thrift -

Twelve Grains of Rice 

From our miraculous inheritance of the 2nd law of thermodynamics and a temperature gradient ... came sunshine, rain & photosynthesis ... and 12 grains of rice grew on Darwin's entangled bank.

All mothers ate 11 grains for survival but smart mothers planted 1 grain and applied TLC, and next season exponential growth from the compounding of both rice & folk resulted ... otherwise neither rice nor folk would be around to tell the tale. 

Theft of value by inevitable parasites & predators was a dishonest, unproductive, zero sum game of no growth and the trauma of a half empty beer glass.

Growth of Value came from speeding up the hard work of investment in profitable projects and was the task of commercial business ... and the bills had to be paid ... it was an evolutionary arms race.

Get on the exponential growth curve or you go bankrupt and stay on it through ongoing innovation ... see the strange story of the Unilever Innovation Funnel ...      

Compound Interest     

Empirical Science & 'know how' itself were on an exponential growth path, and yes, the existing knowledge base of intellectual property could be stolen but growth required the hard work of continuous innovation see compound interest and the strange story of Euler's 'e' ...

There was a big difference between price and value ...

Around1968 Len Hardy at Lever Brothers gave us a natty little diagram which encapsulated the marketing task and we got it; the Real McCoy - 

relationships between wealth & money?

relationships between value & the measuring system?

relationships between customer value decisions & business investment decisions?

But should we trust the markets to inform through prices?

Did inflation make the measuring system elastic and balance sheet valuations suspect?

Wealth was a puzzle when folk thought that rising asset prices represented a real increase in wealth?

 Was real wealth the goods & services produced and sold every year in the economy? 

Was GDP a good measure of economic activity in the economy and why global policymakers want to grow GDP?

Were historical costs useless and mark to market meaningless when markets collapsed or didn't exist?

 Yes ... but how to you measure?

The value of the NHS was not measured by input costs.

Money had no intrinsic value, value came from what it could buy.
Central banks looked at the money supply, and expected it to rise in line with the new goods & services in the economy grew.
More goods & services in the economy required more money in the economy as the balance sheets balanced. But the balance sheets never balanced, there was always a valuation problem and bailouts were preferred to bankruptcy.
States started to create their own money, as tax was followed by borrowing and then by printing.

Too much money chasing too few goods & services created inflation.

Global policymakers fell at the first hurdle. Value and price were different animals. Money and debt came into existence together and disappeared together like matter and anti-matter.
Bank loans create money and debt repayments to banks destroyed money. Bank loans created 97% of the money supply.
It was a debt based monetary system. But how was a loan valued?

Economic growth came from synergies of specialisation & scale.

In a world of complexity, change, conflict & scarcity focus on the growth of 'know how'.
Focus on sustainable income streams. Busy was good. Decentralised Unilever M&A discovered & accumulated innovations from USA & Europe and distributed & sold them globally ... India, China, Indonesia, Brazil, Nigeria ...

How to pay your bills and avoid bankruptcy?

A surplus was necessary to pay for investment in innovation and to cover the impossible gap between investment and revenue. But it was a tough call.

Crowd trouble was around, as to be expected - 1999 Battle of Seattle - 2000 Dot Com bubble - 2001-15 Doha Round & Comparative Advantage - 2008 Financial Crisis - 2016 Trumpeting Brexit - 2020 Covid - 2022 Ukraine ...

The World Trade Organization was lowering barriers to trade and smoothing the path of globalisation since 1995.
Rules-based trade up, protectionist tariffs down and Global Poverty down.
But bribery & corruption crept in.
China joined in 2001 and played by different rules.
WTO became unfit for purpose in an era of fracturing multinational alliances, isolationist politics and possible de-globalisation.

Inevitable Inflation - asset prices rose as consumption suffered and societies fractured into 'haves & have nots' and 'profiteers became the object of hatred' 'overturning the existing basis of society' ... a now familiar polarisation 50% v. 50%.

Money was the dirty word not profit, value was to road to profit.

The more you understand the more you understand how little you understand. 

Life's a sod then you die and there's nowt certain apart from death & taxes. Death was understandable when you ran out of energy. But the world over ... folk hated taxes 'cos different folk at different times in different places had their very own pipedreams and how best to go for longevity. So way back to the Rosetta Stone it was the Bishops were first in line for tax breaks. But the Princes, Generals & Bureaucrats soon learned it was easy to be top peck by bribing folk with their own money ... generous free lunches paid for with other people's money ... someone else would pay the bills.

Tax company profits leave folk alone? ... but and it was a big but ... companies also have to pay their bills ... there was no escape ... as costs went up prices customers paid must go up otherwise ... bankruptcy ... a foul predicament.

And there was more to avoid bankruptcy taxing companies resulted in customers paying one way of another as there was no free lunch ... and, a double whammy ... as prices increased there was an 'xs burden' as output reduced.

The need to pay back lethal debt later was postponed, often overlooked ... was rebalancing the balance of promises was a problem for future generations?

Wealth was production, the goods and services that the economic activity produced, and money measured the exchange value from that hard work, honesty & thrift.

We never did get to the bottom of 2008. Something this big must mean something was fundamentally wrong, and it was, at the lowest level, a general confusion over money and wealth. No one knew, was that why crypto-currencies flourished?

Time to move on to find the relationship between wealth and money, and understand the basic principles of the debt based monetary system.

One of the first things to note in was that there were no books on the mechanics of the monetary system. There was nothing about how private banks created the money supply, and there was little awareness that banks did in fact create money.

Few saw the danger of merging and not clearly separating the money creation side of banking with the investment side of banking.

Free market theories never seemed to explain how the creation of money might upset the apple cart. After all the balance sheets always balanced?

Henry Simons and Irving Fisher supported the Chicago Plan to stop the banks from creating money. They envisioned banks would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. A balanced book. They saw this as beneficial in that its ultimate consequence would be the prevention of 'bank-financed inflation of securities and real estate through the leveraged creation of secondary forms of money. 

Failure to understand how the banking system created the money supply, was getting global policymakers into all sorts of trouble.

Create too much money, and it starts to lose its value. Too little money, and there is not enough money to enable all the possible transactions in the economy. Balance.
Read how private banks created the money supply - Money Creation in the Modern Economy

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So here we go ...sure we were somewhat biased we believed in natural selection and in strange happenings like -

1 - Creative Destruction of Short Necks - Complex Adaptive Systems & Empirical Science  -

2 - Natural Selection of Know How - History Cycles & Miracles of Economic Growth - 3% Compound Growth

3 - This Time is Different - Fatal Conceit & Arrogance of Coin Clippers & their fictitious, ephemeral Know How

4 - Trumpting Brexit - Fish & Fake Noos - imbalances & false narratives - spend, tax & print bubbles, boom & bust and the iron laws of moral sentiments, supply & demand, comparative advantage, total factor productivity

5 - Zombification - Creating Money Out of Nothing & The Big Print - MMM - money attempts to measure value but not values

6 - Business Synergies - Innovation & Excitement or Bureaucratic Kludge & Project Fear - 

7 - Secular Stagnation - Don't Trust Nation States or The State We're In -

8 - Structural Reforms - Drain the Swamp, Fantastical Opportunities -

9 - Tax, borrow, print - Inflation Reduction Act and Chips & Science Act - Whose tax is it anyway? Inventing the ownership of new money? Who owns my Bitcoin Code?

So where to start -

In our state of abject ignorance the 'I know how' claimants were fatally arrogant ... the Bishops, Princes, Generals & Bureaucrats couldn't cope with crowd trouble

... but the 'he knows best' believers were pitifully naive ... there was no God behind every tree, just more complexity, change, conflict & scarcity ... wake up & smell the coffee!      

So be careful what you believe ... go for longevity in your own way, you have the legacy of your ancestors ... a capacity for personal responsibility for hard work, honesty & thrift.

Darwin's process was unequivocal - folk have intentions but it is their interactions with all other happenings that determine outcomes - new understanding followed the unstoppable global flow of ideas - globalisation of ideas, abstractions - exponential growth of know how itself.

No property rights in Work From Home -

' If you can do the job in Tahoe, you can do it in Bangalore'

But a race to the bottom was impossible, bills still had to be paid ... first to market with a good idea paid the bills!

So wot about MMT? Deficits don't matter? Savers mistrusted pontificating prancers and potential future inflation.

Nutshells, every global body cottoned on to a couple of ideas which gained traction -

Modern Monetary Management (MMM) - 'new' deficit financing or old tax, borrow & print cycle?  
Flexibility to borrow & print to fund spending to delay the balancing of the books with productive assets? MMM a constantly evolving body of thinking and experimenting in the real world which is always open to challenge?

The theory -  

fiat currencies don't default, more is printed

government deficit is balanced by private surplus

monetary 'stimulus' is ineffective during the down, fiscal deficits maintain demand

government can spend without having to tax or borrow

money 'creation' keeps interest costs low   

money 'creation' is not constrained until over full employment pressures inflation

inflation is controlled by higher taxation and bond selling to soak up excess liquidity  

The core theory - budget deficits secure and stabilise 'guaranteed' full employment. If necessary spending on infrastructure, climate change & ESG !

But if theory was too good to be true it wasn't true. Bills still had to be paid. Stein's Law - 

'if happenings can't go on for ever they will stop'

High unemployment and excessive inflation were ills which almost all politicians 'promised & guaranteed' to minimise. But government investment remained stubbornly low and inequality stubbornly high. Bills had to be paid.

The reality - new 'demand siders' justified profligacy and suggested they followed Keynes, spend during 'down' cycles save during the 'up' to balance the cycle and avoid inflation adjustment.

But Keynes always aimed to balanced the books with real valuations over the whole of business cycle -

  'Thus the menace of inflationism described above is not merely the product of a crisis, it is a continuing phenomenon of which the end is not yet in sight ...'

Devil was in the detail - Keynesian 'animal spirits' - hubris / nemesis / catharsis? - Frank Knights 'radical uncertainty' - how to 'steer' the economy when the state of the business cycle was unfathomable and the state of private sector was unfathomable? -

international trade was balanced by the exchange rate 

monetary expansion and low interest rates distorted financial stability  

structural unemployment followed a dynamic mismatch of skills & vacancies

wealth distribution influenced monetary finance 

interest was paid on bank created money

moral hazard, zombies & cronies ... political investment was indisciplined

debt accumulation cannot go on for ever ... leading to a day of reckoning ... tax up or spending down

Context for the theory must be a specific financial crisis for the US $, an independent central bank and a ring fenced by law to exclude finance for continuous political crisis's demanding tax cuts, subsidies, bailouts & popularity votes? 

The 'rules' could not be conveniently forgotten -

Debt >60% GDP -- Borrowing 3% GDP ?!

How to target and temper the hubris & nemesis and how to implement the catharsis of structural reforms.

So watch out for -

cycles of spend then tax, borrow & print

promises & guarantees of political grandees

erosions of central bank independence

dashes for growth

progress on structural reforms

Inequality (Piketty) - 'new' redistribution or 'old' compound interest?
Marx had a theory of historical change based on class struggles.
Piketty identified historical patterns in western capitalism of increasing inequality which was immoral?

The theory - a teleological world view - designing   

historical mechanism = cause & effect = R>G, the rate of return on capital in developed countries was persistently greater than economic growth causing inequality - wealth (as capital) grew faster than wages income therefore inequality increases over time as the past devours the future 

neoclassical economics was biased as aggregate data equilibriums did not the dynamic reality of complexity, change, conflict & scarcity and ignored the humanities and other disciplines

observation of available data indicated no moral justification for illegitimate  inequality 

social injustice required political redistribution of wealth, a recurrent theme in all periods and all cultures

wide distribution of wealth, income & education leads to equality and prosperity

nation state political policy should promise & guarantee participatory governance, progressive taxes on wealth and democratisation of the bureaucracies before it causes inequality & political instability 

evolving know how & innovation ??

The reality - an evolutionary world view - diversity              

historical mechanism = natural selection = weeding out failures

evolutionary economics described outcomes of the natural selection of know how, economic growth & compound interest - inequality as diversity was the essential feedstock for natural selection, trial & error learning and economic growth  

observation of available data indicated the moral necessity for the discovery & accumulation of synergies of specialisation & scale in social species

social injustice resulted from the incapacity of political dirigisme to deliver the utopian ideal of redistribution and persistently produced poverty, stagnation and the rampant inequality of communism

wide distribution of wealth, income & education leads to prosperity but not equality

nation state political policy should avoid promises & guarantees of investments chosen by '51%' without the protection of minorities and the '49%', fairness of shares & resentment of cheats and eroded further by globalisation

evolving know how & innovation determine the rate of return on capital investment not ownership - economic growth demands continuous innovation, it is know how that evolves    

Diversity / inequality were always outcomes of evolution & the Laws of Nature in the environment of complexity, change, conflict & scarcity.

The fundamental viewpoint of evolutionary economics was that survival by natural selection was -

intensely economic, discovering & accumulating synergies of specialisation & scale

diversity was the essential feedstock for selection in populations of social species

intelligent design Bishops, Princes, General & Bureaucrats was anathema

an arms race between productive synergies and parasites & predators.

But was this all baloney? There were plenty of idea hatcheries ... Coffee Houses, The Rialto, The Goshawk, Silicon Valley, Water Fountains, Research Labs ... but they all had to be tested against the rigours of reality ... against the laws of nature ... and 'e' = 2.7182?  

exponential growth and decay described by y = = e^x, x = anything ... but  e = 2.7182, a universal constant

individual responsibility for skills. education & understanding growth when 'e' = 2.7182 always synergies of specialisation & scale

redistribution via tax, borrow & print cycle was never a basis for social justice

political polarisation resulted as 51% screwed 49% as financial elites (or “merchant right”) favoured open markets and educational elites (or “Brahmin left”) favoured cultural diversity

evolutionary economists as Darwin suggested, demanded diversity AND open markets as synergies of specialisation & scale were discovered & accumulated in the face of ignorance, complexity, change, conflict & scarcity

And there was another 'and', and autocrats & bureaucracies tested fewer ideas than liberal democracies.    

1 Creative Destruction of Short Necks

Complex Adaptive Systems & Empirical Science    

We were in awe of Charlie Darwin and we couldn't help but notice that day by day the evidence mounted ... all the double blind randomised control experiments in Scunthorpe which were repeated in the Antipodes 17½ nights later with the same peer reviewed results became meaningful irresistible evidence which could never be ignored ... the giraffes grew long neck simply because short necks died out.  

Real Money was the greatest thing since sliced bread, real valuable 'cos real money was trusted for exchange, accounting & investment & saving for a rainy day.

Everybody wanted money it was needed for everything of exchange value ... gold, fiat, credit, trade, defence, indulgences, friends, picking winners, usury, taxes, profit, regulation ...

All based on trust, wot an outrageous gamble ... why on earth did folk trust cowrie shells? Gold was much easier to understand but bits of papers receipts for gold in safes? ... and then it got hairy when folk started to exchange deposits owned by other people? ... and then deposits of strangers? ... gambling that debts would not be called in simultaneously? Lethal debt.
... Bank runs & crashes relentlessly followed as trust collapsed ... time after time after time ... 1637 tulip mania, 1725 south seas, 1929 great depression, 1972 great inflation, 2001 dot.com, 2008 real estate, 2020 Covid ...

Due Diligence? Caveat Emptor? Too big to fail? Do whatever it takes?

Wotever happened to learning?

2 Natural Selection of Know How 

History Cycles & Miracles of Economic Growth  

A History of Business Cycles.

The market search for clearing prices which eliminated expensive gluts & queues was particularly difficult because it was new fangled innovative technology which was driving evolutionary change. And innovation & evolution were not facile processes ... but fickle ... capricious ... vacillating ... with hitherto unconnected connections ...

As long ago as 1942 Joseph Schumpeter had sussed out economic growth and the associated cycles of booms & busts, Kondratieff Waves and Business Cycles, he called it 'creative destruction' ... but perhaps the ancient Greeks had cottoned on to the process years ago as the phoenix rose from the ashes? ...

So it came to pass, as they struggled to solve the puzzle of wealth creation & economic growth, some economists changed their focus from the static equilibriums of neo-classical theory to progressive change and creative destruction ... they opened up the road to Paul Romer's 'Endogenous Growth Theory' of the 1980s ... perhaps endogenous was just another name for natural selection? ... perhaps neo-classical analysis using exogenous variables was a misleading simplification which introduced new distortions as theory effected policy? ... for sure economists themselves & their theories were part of natural selection as everything interacted with everything else ... so nothing could be exogenous ... could it? ... think about it ...

Evolutionary scientists & economists began to suspect that Schumpeter's cycle of creative destruction involved real energy flows which generated real emotions which mediated real decisions which created real innovations which were accompanied by real money flows ... the whole shebang & caboodle from genes, to brains, to theories, to policy, to actions was an evolving interconnected whole ... emotional cycles, activity cycles, business cycles, credit cycles ... nothing new ... just one damned innovation after another ...

The deep point about the evolutionary process of creative destruction, was that the cycle of boom & bust was the result of a cycle of emotions ... a cycle of chemistry in the brain ... a heady mix of testosterone & dopamine, in diverse proportions, a chemical cocktail which triggered the firing of neural networks ... choices of behaviour to try out ... deep deep down in the skull there were competitive emotions of excitement & fear as neural networks & circuits drove emotional flip flops which generated a diversity of ideas, which resulted in innovation actions some of which were successful as old 'know how' was replaced by new 'know how' ... endogenous emotions created diversity ... this was not about exogenous plans & instructions, but better described as Keynes' 'animal spirits', Greenspan's 'irrational exuberance' and FDR's 'nothing to fear but fear itself' ...

Here then was the essence of the evolutionary reality of economics, cycles of emotions inspired cycles of innovation -

Optimism - Excitement - Thrill - Euphoria - Suspicion - Anxiety - Denial - Fear - Desperation - Panic - Capitulation - Despondency - Depression - Hope - Relief - Optimism ...

Crucially the emotional cycles were way beyond the control of Bishops, Princes, Generals & Bureaucrats ... all these soothsayers were, of course, an integral part of the evolving whole shebang & caboodle, influencing activities and creating waves but all the time they were ignorant of outcomes ... the powers that be just trialled & errored like everyone else ... not easy to accept, is it? ... after all some folk had sound judgment? ... sound judgment about the future? ...

In this way folk were driven to experiment, 'to truck, barter & exchange', whenever & wherever they saw an opportunity to discover & accumulate synergies ... whenever & wherever there was an opportunity for specialisation & scale ... whenever & wherever they found market clearing prices which avoided expensive gluts or queues ... whenever & wherever there were different opportunity costs for comparative advantage ... whenever & wherever they discovered better total factor productivity ... and whenever & wherever they discovered a new mouse trap which folk found exciting ... whenever & wherever company failures released resources for better alternatives ... whenever & wherever there was creative destruction ...

The crunch was that adaptations depended on differential survival of behavioural traits as everyone rushed around trying to survive ... there was no slothful indifference ... and perhaps the evidence was in the history of the industrial revolution? ... did self sustaining economic growth result from synergistic deals, underpinned by the rights & obligations of Tort Law, controlled by invisible hands, where everybody traded their technological innovations and where failure & cycles were manifestations of Darwin's natural selection? ... a far cry from 'fixing prices', 'beggar-thy-neighbour', 'picking winners' and 'moral hazard' ... and was it the history of the industrial revolution which suggested self sustaining economic growth was measured by the audited Balance Sheets of competitive companies? ... measured by money balances?

Excitement -

Money facilitated & measured cash deals, but there were also credit deals which provided money now for repayment later ... then there were deals in money to make more money ... continuous innovations ... one money substitute after another ... cash, credit, bonds, stocks, shares, insurance, options, puts, hedges, derivatives, credit default swaps ... all at a cost, there was no free lunch ... but money was a superb product, everyone wanted it ... what excitement!

Fear -

But money was always painful to produce because money was all about trust & confidence and trust & confidence had to be earned ... discovering value was hard work ... accumulating value was hard work ... everyone enjoyed instant gratification (ask the boys?) ... saving & investment was risky (ask the girls?) ... no wonder some folk went for short cuts and tried to steal ... as soon as their were stocks there were thieves ... as soon as there was cooperation there were predators & parasites ... as soon as there were coins there were coin clippers ... immunity from this treachery was impossibly difficult, it was a never ending arms race, eternal vigilance was always required ... a strong dose of 'caveat emptor' & 'due diligence' ... what fear!

did it always go in cycles of success & failure? ... could the banks ever hope to cope with those wretched business cycles and the short term hysteria of boom & bust? ... how did the banks cope with the greed, bribery & corruption of political intrigue and government default & inflation from the king's printing presses? ...

This was evolution, all about inheritance with random modification and differential survival, but it was the random modifications which caused the trouble. Folk could get a grip on inheritance but randomness was bewildering ... but it was the random mutations that created the new survival value ... and the random mutations were completely unpredictable, nobody knew where the next good idea was coming from. In such abject ignorance about the future new ideas had to be discovered and then accumulated by testing against the rigors of reality ... this trial & error process was spurred by the flip flops in the cycle of emotions, instinctive excitement & fear ... and excitement & fear were both contagious ... the trial & error process must have resulted in cycles ... mustn't it? ... think about it!

In this way the pricing of technological innovation was scary, nobody could predict what the best product would be never mind its future price. Sure, the pricing of potatoes was a little less difficult as it always seemed that when prices were too high there were gluts, and always when prices were too low there were queues. Cycles were the only way survival value and associated clearing prices could be discovered. This was a search ... heuristics with an emergent outcome ... there was no way the immensely complex synergies of specialisation &  scale and comparisons of opportunity costs & marginal utilities could be calculated ... but this never stopped the soothsayers from trying to fix prices and then blaming the adaptive process when their arrogant designs failed ... some folk got it ... survival came not from soothsayers but innovative technology ... so folk were in a cleft stick! ... folk were stuck with cycles!

It was a hit & miss affair, everybody was guessing, nobody knew what was happening, but there was always excitement & fear ... and business cycles.  'Kondratieff Waves', booms & busts, as well as runs on banks, stock market crashes, asset bubbles, currency crises, sovereign defaults ... and lynch mobs, riots and crowd trouble ... how many cycles? ... all cavorting in a mad dance one on another, one with another ... crazy bewilderment ... in different folk, in different places, at different times, at different speeds with different outputs ... as cycles interacted there were amplifications & suppressions, combinations & displacements ... big booms & busts and small booms & busts ... overshoots of euphoric experimental discovery... undershoots of odious experimental failure ... one damn cycle after another ... prices of coffee influenced prices of tea ... and some even suspected the price of potatoes influenced the price of holidays in Benidorm ... prices seemed to be all over the place ... especially after a failure of the rain dances ... and what of the stupendous puzzle of money itself, and credit, and new cowry shells and coin clipping inflation? ... no wonder it all went wrong so often?

Immense complexity, layer after layer, distortion after distortion, impossible to simplify ... but each distortion presented an arbitrage opportunity which tended to push prices to a clearing level like a strange mimic of Le Chatilier's Principle ... and then each discovery added further complexity ... as entropy increased ... oh gawd ...

However there was some good news ... there was a growth trend ... it seemed, relentlessly (some said particularly since the industrial revolution) technological innovation produced an underlying growth trend of around 3% pa. Business cycles were manifestations of creative destruction, of markets coping with the perpetual change of technological innovation by discovering clearing prices in new situations. There was no efficient market theory, no market equilibrium of classical economics orchestrated by the mythical Walras auctioneer.

Increased 'know how', technological innovation, grew steadily as folk learned from the cycles of discovery & accumulation. Economic growth averaged of 3% pa not in spite of cycles but because of them!

The ubiquitous inevitable cycles were easily recognised in the history of economic institutions, companies and banks all over the world ... but the cycles of discovery always seemed to be associated with knee jerk hysterical responses, which often seeded & fuelled the next cycle ...

The hysteria was not mal intent it was ignorance of necessary diversity & complexity!

1972 Oil Price boom ... Port Sunlight ran out of phosphate as inflation roared and products were sold below real cost ... 'price on replacement costs' or ran out of cash and go bankrupt ... !!!!!! M F A Jones was ecstatic everything went through the roof at give away prices and the raw material stores were MT ... 

2001 DotCom Internet Boom - innovative technology bubbled & crashed - the response was an attempt to blame regulators & auditors as they lost their underpants by failing to spot troublesome valuations on Balance Sheets ... was this an attempt to replace the principles of 'caveat emptor' & 'due diligence'  and  bankruptcy with another layer of regulation (Sorbane / Oxley)?

Evolutionary economic growth from technological innovation could not be regulated, the next crisis always involved a different innovation.

Governor of the Bank of England, Mervyn King -

'Regulation is a delusion. Thousands of pages of complex regulations tried to get to grips with alchemy of fractional reserve banking - short-term safe funding into long-term risky lending - but most of the time cheap capital flowed to finance real investment ... until the bank run required central bank liquidity.

The problem moral hazard as banks take XS risks!

So who gets the bailouts? Banks, pension funds, insurance companies?
How much? PFAS or FXM?

The paradox - evolved brains were chukka with infinite ingenuity BUT brains were constructed by primitive flip flopping emotions of excitement & fear as the evolutionary feedstock which created the essential diversity for trial & error learning.

So many questions ... all that anguish & hysteria ... but bubbles burst, what else were they expected to do? ... it seemed business cycles were part & parcel of a common pattern of technological evolution which involved -

natural cycles of emotion - deep down in the skull decisions were being driven by ancient neural survival circuits which generated excitement ... and fear...

frantic activity - most folk were going for betterment by chasing profits & cutting losses ... some folk were stealing ...

herding instincts - folk everywhere were social animals and ignorant, it was only hindsight that exposed which deals were daft ... everybody wanted to keep up with the Joneses ...

bottom up innovations - different products or service opportunities were involved each time ... old technology was replaced by new ...

top down regulation - each new crisis brought new regulations justified by 'market failure' ... Bishops, Princes, Generals & Bureaucrats had a vested interest in preserving their old technology by 'fixing prices', 'beggar-thy-neighbour', 'picking winners' & 'moral hazard' ...

eventually prices adjusted to the new reality as the bubble burst - nobody was willing to foot the bill for those wretched gluts & queues ... Balance Sheets had to balance ... there was no way round that ...

After all this contorted history of complexity, change, conflict & scarcity it came to pass that the soothsayers couldn't manipulate the future ... perhaps Adam the Smith got it right ... hubris / nemesis / catharsis ...

 

 

 

Natural selection delivered the flip flopping emotions of excitement & fear which created the randomness in the mutation essential for trial & error learning.

 

But in between crashes strange happenings seemed to work? ... for a while? Why? How?

Think & focus on the company Balance Sheet which tries to account for 'money'. Think risk & uncertainty ... think time shifts for anticipated future income streams ...

Tom wanted a loan and young Jessica was asked by her boss in the bank to type in some digits on both sides of his Balance Sheet ... that's it ... job done.

The Liability seemed to be clear enough ... but who said the the balancing loan Asset was valuable?

And both sides of the Balance Sheet required a reliable measuring system.

No wonder bad debts & cons & Ponzi Schemes were born as trust collapsed  ... time after time after time ...

The fatal flaws - 'do whatever it takes to keep interest rates low'

low productivity - production of obsolete zombies 'hog resources'

inequality - the hunt for yield asset prices rise 'sugar highs' 'crowd trouble' 'let them eat cake' 'bribery & corruption' 

risk assets - 'cash at risk' wot was the point of saving for a rainy day to pay tax again as unearned income or wealth taxes

bounce back loans essential? - folk had to eat -  hospitals had to treat patients - folk had to discover, test & produce a vaccine - business supply chains we're kept alive with the big print  TINA

as soon as there were stocks there were thieves - £50,000 (or a quarter of turnover) loan free for 12 months then 2% interest fixed for 10 years (lots of companies suddenly had turnovers of £200,000)
No Due Diligence & Caveat Emptor = fraud without banks 'loaned' to fraudsters who then went filed for bankruptcy 12 months later when the Porsche had been purchased ... then same loan from the bank across the road ...
Nigeria - free loan for cement - then free loan for spends ... why bother to order cement the ships & revenue never arrived
China- when money comes out of your ears it goes into a real estate bubble ... 

some were taking the £50,000 and investing in equities ... within the law! The money was to tide over not for specific bill paying

and MMT demands 'understanding' of effective 'demand' ... jeez ... without trust and moral sentiments the system collapses.

Lethal debt continued to bug ... why?

Why gold standards? Why reserve requirements?  Why stress tests? Why responsible lending?

Why borrow? Why tax? = to create demand for $s !

Excess $s ruins the game!

Why bother to work? - invest? - defend stocks? - steal stocks?

An annual wealth tax was undesirable, being extremely expensive and difficult to levy, while also damaging incentives to save and giving a huge boost to the wholly unproductive industry of tax avoidance.

Maslow answered that folk ache for money, 'fake' or real, to exchange for crumbs, to fund rainy days, to buy trinkets to impress, and to buy 10,000 hours time to invest in an apprenticeship for future productivity ...

Money which was then taxed & spent, borrowed and printed by the Bishops, Princes, General & Bureaucrats up there to maintain grip and suppress crowd trouble.  

A new justification for the big print - stimulus, pump priming, flattening the curve, ... but delaying economic growth and 3% pa compound.

Glib Folk suggested ordinary folk demanded fiat $s to pay their taxes? (Why not Bitcoin or Facebook Libra?) 

Naw ... flawed motivation ... after tax income matters! Why did you rob the bank Mr Smith, 'cos that where the money is ... jeez I didn't rob the bank to pay my taxes!!

1. to pay taxes -  avoid jail?

2. to store value - avoid inflation? but commercial banks also create excess $s = how to 'control' money supply ?

3. to procure iPhones and a cure for cancer - amass katundu ... more relish ... and smiles at the brie on the khonde with the greens ...

4. emerging economies demand $s to buy oil et al ...

... and for 1 2 3 4 5 above

Not top down but bottom up

Property Rights Tragedy of the Commons Price Mechanisms waste is a cost ... but Elinor Ostrom had a point?

Bitcoin? Unilever Shares as money it need not be fiat?

NB fiat print didn't deliver iPhones or cures for cancer, nor innovation & 'know how' ... i.e. profitable projects  / productivity / economic growth / synergies of specialisation & scale = global demand for $s.

Burundi can't print Burundies because folk have to pay taxes !

USA did it because it was 'backed' by a productive economy ... and 'reliable' taxes ... excess $s just kill productivity!

Tax evasion deprived governments of revenue. Money laundering was the other side of the same coin.

Tax evasion sucked money out, money laundering pumped money in.
Dirty money was just another source of investment into otherwise declining economies.
Capillary systems ultimately benefit ordinary people, turning many into the devotees of autocrats and thus corrupting entire societies.

3 This Time is Different

The Fatal Conceit or Command & Control of the Future    

Same parade, different clowns?

We were wired to experiment with the trial & error of myth, magic & mirrors, conspiracy theories & top down explanations for happenings we do not yet understand; we needed optimism in world full of complexity, change, conflict & scarcity ... hope from empirical science rather than trust in arrogant messiahs.
We were old fashioned, we were not supply siders or demand siders, we believed every handshake involved mutual benefit otherwise it would not be sealed with trust.
Banks must be independent of political malarkey & red tape to discover & accumulate synergies of specialisation & scale wherever & whenever.
Compound interest or bankruptcy followed. Subsidies, bailouts, price fixing, QE, stimulus? All top down dirigisme arrogances. There was no shortage of money in Weimar nor Zimbabwe. Maybe 'inflation' was the fairest tax of all, all prices went up?

We all inherited life & existing know how. No one had to relearn e=mc2 it was in the bag, everyone had to acquire their own skills to trade ... it usually took about 10,000 hours! ... and picking winners in advance was a mugs game!

Yogi Berra - 'In theory there in no difference between theory & practice. In practice there is.' 

Inflation Reduction Act $369bn - Chip & Science Act $280bn   

MMT in action - spend on 'Christmas Trees', everyone has a bauble ... no need to balance the books ... its the economy stoopid ... protectionism & mercantilism, never heard of comparative advantage and 'what do we do better than out competitors?

 The typical arrogance of POTUS as Biden announced on 9 Sept 2022 the astounding rejection of the 10th and 14th amendments - and then $370bn 'Inflation Reduction Act' -

'our patience is wearing thin!'

Tax borrow print, the cycle of doom, repeatedly repeated as the clowns ran out of ideas. The bureaucracies reverted once again to protectionism & subsidies to avoid crowd trouble with meaningless promises & guarantees.

One thing was certain when the clowns departed, the acrobats still jumped through hoops and the magicians still faked it.

When Trumpeting Brexit passed from memory, the swamps of Washington, Brussels & Westminster retained their inevitable bureaucratic kludge and had a new reinvigorated life of their own -

as soon as there were stocks there were parasites & predators, bribery & corruption, tyranny & oppression  

plus ça change, plus c'est la même chose ... tax, borrow, print ...     

As history perpetually indicated two very different narratives polarised the beliefs of ingenious folk who manipulated & distorted their perceptions to fit & justify their favoured story which, when confronted & challenged, soon became burning passions of hatred.  

Empirical Science provided evidence for the resolution of some disputes but not definitive answers ... always leaving wiggle room for sceptics ... simply because of Frank Knight's uncertainty. 

1859 was chosen to illustrate a fascinating birth of a new story based on Empirical Science which blew away the all pervaded water of creationism. Top down intention became bottom up natural selection ... fundamental destruction ... shattering.

FTX in Florida          

Then after the crash Sam Bankman Fried @ FTX in Florida had a go at innovation -

 Not Bitcoin (token gold), but rather Blockchain (valuable gold).
Not lethal debt but rather ownership of collateral.
PQ = MV  
Margin calls as prices fluctuated were not leveraged debt but mutualised collateral.
FTX was 24/7, instant automatic liquidation of collateral ... real time ownership change of real collateral ...
Collateral was the gold flowing thru the plumbing, continuously instantly deleveraging &  adjusting to price changes.

No collateral position is closed out at Monday morning opening, no systemic risk?

survived by sucking in new money
should at all times have access to the equivalent of 100 per cent of their client’s funds
a major exchange like the London Stock Exchange must never be closely affiliated with a market maker
the margin lending by FTX to Alameda was not in essence allowing the founder to go to the casino with client money

 

Crowd Trouble forced attacks on the Gini Coefficient. It would be a brave politician to allow a wave of insolvencies to occur on their watch particularly in an election year ... even if the result was manipulated ... of course gerrymandering ain't new either.  

Impossible odds more and more inequality as diversity resulted as evolution speeds up -

2nd Law of Thermodynamics dictates diversity / random mutations / natural selection

left brain right brain

girls & boys

profit & loss

torts trade technology - education

digital divide - AI

weeding out failures

 

Curiosity ... why did two old men with polarised beliefs resort to blame & burning hatred? As usual there were two narratives, Honest benevolence or Conspiratorial deviousness. Beliefs polarised and folk who bothered to vote split 50% / 50%. Take your pick!

But the two sides of polarisation were both command and control autocrats ... uber alles ... hubristic narcissists !

Old men messing with our minds? Each trying to out spend the other on election bribes? Messiahs never win but failures do lose? ... if you get the drift of natural selection weeding out?   

Every day the evidence mounted, Darwin was right the mutations were random, selection was natural.

So it did not matter which of the old men with a plan won an irrelevant election ... blame & hatred were cul-de-sacs.  

How to protect minorities ... women and children, native aborigines and slaves ... and all other folk with a different plan?

Jefferson saw problems of bureaucratic kludge, parasites & predators, tyranny & oppression, bribery & corruption - rent seeking greed in centralised bureaucracies

Hamilton saw opportunity for enterprise & surpluses - diverse wealth creating commercial companies 

The Constitutional triumph was separation of powers and checks & balances on autonomy of Administration, Judiciary & Legislature. The 10th and 14th Amendments.

Everyone and anyone could be an inspiring leader but only one could be a dictator.

The man with a plan was lethal when confronted with an unknowable future.

'The king is dead long live the king' 'Hope springs eternal' 'yes we can' 'make America great again' 'get it done' ... we search for leaders in the wrong place ... maybe everyone should 'stick to their own knitting' ... maybe the leaders to watch were the empirical scientists like Dan O'Day and Pascal Soriot who 'get on with the job' of discovery & accumulation? ... and clearly they were only passing through the institutional hot beds of innovative technology ... commercial businesses who paid their bills and searched for betterment know how through human capital ... helped by torts, trade & technology.   

'plus ca change plus la meme chose'  

Who do you blame for Covid? - Why warp speed?
Who do you blame for Brexit? - Why Brussels bureaucracies?
Who do you blame for economic activity? - Why obesity epidemics?

'thank you for the seeds, we're too old to plant trees for our own gratification, but we shall 'do it for posterity', 'minorities possess their equal rights, which equal laws must protect'

Just sayin' ...

This time was no different ... remember the coin clippers? The trouble was that 'normal times' was hardly the test. The test was what happens when the bureaucracies make a quite exceptional bid for power. Under such duress, Britain’s tolerance of whimsy norms may not quite enough by way of counterbalance. But will the enshrined laws in the US constitution better withstand the excesses?

This time was not different ... the patterns were unmistakable. 

Money was presented as an object which was so culture-free that financiers became used to modeling it with equations drawn from physics.
In the wake of the 2008 financial crisis, even mainstream economists were groping to find new frameworks to describe money.
First - individuals did not act in isolation we were social animals.
Second - individuals were ignorant, grappling with uncertainties 'cos knowledge was dispersed, tacit & incomplete.
Third - wealth was 'know how' = sustainable production of social & human capital
Dynamic - 2nd law
Changing - measurement system - fast cash & slow investment
... but we'll all be either rich or wrong ...

Happenings were momentous, but there were glimmerings of understanding of adaptive immunity?

4 Trumpeting Brexit, Fish & Fake Noos? -

Delusion & Illusion?

The Twin Narratives? Top Down & Bottom Up?

Incities & Outs (Jonathan Larson & 'Superbia' & 'Rent') - transfixed with Fake Noos 'entertainment' from their iPhones in their couch cocoon! Puccini 'La Boheme' again ... wot news on the Rialto? Not haves & have nots but rather them & us!

Endless attempts to right the world thru tax, borrow & print time to try -

hard work, honesty & thrift ...

torts, trade & technology ...

Folk were like fish living in a false reality called water, so familiar, all pervading, transcendent & immanent it became unnoticed, unremarkable ...

The false reality we called human intention. It's easy to run the narrative ... so obvious that we never choose to think about the opportunity costs. The closure of the mind to alternatives ... arrogance ... 'you are the center of the universe' ... choose a different narrative.

We called it 'the echo chamber', endless repetition of the same viewpoint became a permanent 'intentional stance' ... until the Necker Cube' fliped.

The most obvious, ubiquitous, important realities were often the ones that were the hardest to see and talk about ... then came the realization that the source of the echo never really existed in the first place! Wot then?

Unconscious Default Mind Set - the all pervading Intentional Stance - continually reinforced as transcendent & immanent - unimpeachable

Choice over what You Think - Behaviour can be Enforced but Imaginations are Free to cogitate - learning that the paradigm can shift

Think About It - intention cannot control future outcomes because we never know which of the multitude of random mutations will survive to interact with other happenings ... scepticism there maybe alternative facts ... it is not good luck I wish you far more than luck!

The real economy was about values not about valuations and money printing.

Values were independent of money but intrinsic to the asset.

When the collective consciousness stopped believing that growth can be created by money and debt expansion the entire medium must fall apart.

Value was generated from the money, an asset was worth what different folk were willing to pay for it at different times in different places. 
Passive investment momentum overloaded the system as a self fulfilling whim of the moment maintaining existing business in unison and squeezing out innovation. 

Contrary to the usual way of thinking

human intentions (intelligent design) rather than natural selection (Darwinian evolution) = Price Fixing

fiat money rather than balanced Balance Sheets = Zombies

value rather than values = Reith Lectures

Imbalances in -

supply & demand =

too much money (zombies) & too few innovative goods = stagflation 

too little money (austerity) & too many obsolete goods = secular stagnation 

savings & investment =

rainy day funds (fear) &

profitable projects (excitement)

values & value =

long term sustainability &

short term hysteria

Buying time v. pulling the plug. Flattening the curve! Adjustment to change.  

5 Zombification - Creating Money Out of Nothing & The Big Print

The big print had a big problem - too much money was jammed up in inefficient bureaucratic kludge as grandiose programs satisfied elevated egos and sidestepped hard work, honesty & thrift as the scams were funded with the money confiscated from other folks at no risk ... coin clipping.

Of course, spent wisely, by picking winners, wonderful excellence from much needed essential infrastructure projects could be secured along with jobs & prosperity for all.

The problem - politicians were bad at picking winners but losers were good at picking politicians

But we all remember Thomas Telford's foray into the Caledonian Canal ... a splendid public investment into obsolete technology ... and Concorde ... splendid purposeless technology?  

The experts at wot? Chose wot? The wot that mattered was the next good idea, the next bit of innovative know how that worked ... and, of ourse ... nobody knew what which why how or where the next good idea was coming from. 

But wot was modern monetary theory?

A subversion of money’s role as a token of reciprocal altruism that allowed large and diverse societies to function.

MMT was economic suicide, fiscal and monetary largesse.
In the 1980s globalisation and the entry of China (+ Russia) into the world economy (India & Africa to follow). But Doha failed to cement advantage as China manipulated DFI and FX and purchased American real estate. The big money print to sustain growth & zombie jobs (in the face of lack of demand for zombie penny farthings) flooded into inflating asset prices. Surging debt on Balance Sheets which was not inflated or taxed away.
In 1970 an ounce of gold would cost you a little under $40. Now it costs a little under $2,000. A 50x debasement of currency in 50 years. There has been enormous inflation in stocks, property, works of art and all other investment assets = rising domestic inequality, falling global inequality.
The fallacy of the economists is to think that the velocity (and quantity) of MONEY is the economy but money is only the MEASURE of the economy. It is the velocity of goods and services which is the economy - economic activity, productivity.
Young 29% to 19%
Retired 10% to 17%
Immigrants ? to ?
From zombies to waves of defaults from extended State & Corporate Balance Sheets.   
Worker 'power'? Or robots, AI, 3D Printing, photosynthesis ... do the heavy lifting?
Demand is NOT weak for economic growth = iPhones and mRNA!

Completely discombobulated? Yes avoid the 'global domino run' but speed up 'weeding out failures' ... understand the deep difference between liquidity & solvency.

Four straight decades of growing government intervention in the economy have led to slowing productivity growth - Keynes never said spend constantly through the business cycle ... 'fine tuning' involved spending during downturn and saving during upturn but politicians spend all the time to justify their existence! - voters are justifiably befuddled by the claim that governments can borrow without limit or any consequences - cumulative impact of constant - low rates liberate governments to borrow and spend in unlimited amounts for the foreseeable future. But this claim gets the story backward. Instead of a path to freedom, low rates are a trap. They encourage more borrowing and rising debt, which drags productivity lower and slows growth
 stimulus - forcing central banks to keep rates low - asset prices and inequality grow - linking falling productivity to easy money - big spending governments tend to suffer slower per capita GDP growth - result weak growth, financial instability and rising inequality

Going all out hell for leather to PREVENT bankruptcy & restructuring! Prevent mass corporate extinction causing the loss of millions of jobs as workers moved to more productive jobs. Freezing activity into obsolete companies, thus stopping in its track economic growth which depends on weeding out failures rather than reinventing the wheel.

zombie companies are unproductive, invest less and suck up resources that could otherwise be redeployed in more dynamic areas

The Beltway led the way from Washington to Brussels to Westminster the cry was 'do whatever it takes' to keep interest rates low ... 'print fake money'? $1.9 tn 'stimulus' ... jeeez ...

If it doesn't make sense, it doesn't make sense!  

Bond-buying programme - accept bonds as collateral - lending money to banks at rates as low as minus 1 per cent
plus fiscal stimulus = discourages consumers from spending & working and businesses from investing = why bother if prices will be lower in future = even more?
when you're in a hole stop digging!

A new word appeared regularly in the FT 'zombification' !

Companies kept alive artificially by the repeated extension of credit.
Many blame on the Central Bank’s aggressive QE which stymies long term growth because it keeps capital & labour locked into inefficient parts of the economy and chokes innovation.

Covid relief made things worse, keeping more zombies alive!

Suspension of the obligation to file for bankruptcy ... insolvent companies continued to trade, no need to pay the bills .. wot a gas!

Other factors were also at work regardless of QE, inherent structural shifts & distortions in the economy from torts, trade, technology, leading to lower productivity/profitability.

The way to fix the problem, they say, is not to raise rates, but to pass structural reforms. 

Zombification was not just a physical experience, it was also psychological.

We learned about Voodoo and jazz in New Orleans. Psychological or cultural predisposition was imperative.

After being buried alive, the victim’s reawakening as a zombi involved a new mind set. The victim had to reconstruct their identity as a zombie induced by the psychological trauma. To survive zombies developed their own strong beliefs & culture ... which 'controlled' perceptions and future actions.

Social reinforcement of beliefs further secured their zombie identity and 'club' membership. Psychiatrists emphasized the connection between social & cultural expectations and emotional compulsion ... dysthymia.  

Low nominal interest rates led to two problems - (well understood by SJ who studied biology AND psychology at Leicester - and JP who played jazz with his right brain, studied thermodynamics with his left brain but underneath the soap pans in Apapa he needed BOTH to survive !)

1. physical = hogged scarce resources – capital & labour – When they should be employed more productively elsewhere. The process of creative destruction stops. Low interest rates keep ‘zombie’ businesses alive thereby obstructing structural reforms - weakening economic growth, which eventually led to a vicious circle of low growth and low interest rates.

2. psychological = why bother to saving & investment & innovation - zero interest rates, no taxes, no innovation, no investments ... no structural reforms. Fears of inflation and financial bubbles and financial collapse encouraged pre-emptive interest rate increases which scupperded investment.
Productivity falls.

Evolutionary Economists proclaimed - The long neck of the giraffe resulted from the death of the short necked variety. Natural selection.

Evolutionary Economic growth results from the death of zombies not from the intelligent design of wealth ... money printing pushed up the value of real income streams ... think business, think evolution. 

Abenomics owns 50%, B of E owns 44%  Fed owns 22% of Government Bonds = zombification.    

Abenomics (3 arrows in the quiver) and EU Recovery Fund $750bn and Biden Stimulus $1.9tn
Wolfgang Schäuble told the Financial Times 25th Jan 2021 -

There is a lack of real progress, a lack of efficiency in the execution, in the member states. These difficulties worry me. The EU had spent too much time arguing about the size of the 'stimulus' fund and how the money should be distributed, and not enough thinking about what to spend it on. We should long ago have defined what areas the member states should be investing these funds in — artificial intelligence, digitisation, policies for tackling climate change. His remarks chime with those of other European officials who worry that member states are dragging their feet over submitting detailed proposals for how they intend to spend the money from the fund on structural reforms.
The recovery fund cash was for economic reforms designed to deliver lasting improvements to the growth prospects of recipient countries, and to boost innovation, digitisation and facilitate the shift to a green economy. We know very well what urgent steps each country must take to make Europe’s economy stronger, more innovative, dynamic and better able to compete globally -
There are blockages and that all this is too slow, that we need to accelerate and that if we want to emerge from the economic crisis in the best conditions, the European money must arrive as quickly as possible. We didn’t expend all that political capital only for the plan to be delayed for technocratic reasons . . . It’s too slow and it’s too complicated, we have the highest debt levels in our history, the lowest interest rates in our history, and the largest investment needs in our history - Bruno Le Maire added.

EU Stability and Growth pact limits annual public sector deficits to 3 per cent of GDP and debt to 60 per cent of GDP.

On 6th November 2014 the headlines raged - 'Auditors Refuse to sign off EU Spending for 20th year in a row' - 19th Feb 2019 - 'EU said, a farmer was granted a special premium for 150 sheep. The Court found that the beneficiary did not have any sheep. The corresponding payment was therefore irregular (not fraud)' - spend/tax/print was not a one off never be repeated ploy.

Spending was not for the production of Zombies and bailouts for bankrupt States!

Of course Brussels had 'suspended' the enforcement of the Stability and Growth Pact. Or was it a 'Hamiltonian moment' which created the American fiscal union by taking on the debts of the states in 1790. Strengthening the resistance of those who fear their independent identity would be lost in European integration!

It is a one off for emergencies ... as it always had been at the bottom of the business cycle ... but this time was no different ... the debt was never paid off at the top of the cycle ... and always eroded away by inflation ... but inflation had to be balanced by innovation ... which must speed up thru 'structural reforms' ... 

Regulation & Red Tape

Markets were driven by flows and investor positioning, rather than by the underlying fundamentals of businesses
Passive investing and leverage enabled by low interest rates (financial repression & QE).
In 2008 a new series of splurges started under the shadow of necessity ... grotesque distortions ... too big to fail ... this time different?
nobody knew whether the big print would be able to perpetually bail out markets
Ever-rising share prices that had no basis in fundamentals birthed yet another meme, 'Stonks!', which fed frenzied retail speculation.
https://www.youtube.com/watch?v=if-2M3K1tqk
https://www.ft.com/content/dbfc69df-7dbc-4338-a475-1432ffdc4056
Markets Do Not Represent Information. They Represent Transactions.

Andy Haldane chimed in ...

The Doom Loop - the best laid regulatory plans perished their first brush with reality. 

Unprecedented growth in passive investing as money was printed and Zombies were everywhere.
Current prices didn't reflect all available information (in the real world transactions costs, information costs, diverse expectations & irrational investors)
How do you invest in the index you are trying to beat when prices in the index are changing every second? How to cope with momentum trade?
Systematic volatility selling, passive investing and illiquid markets were not going to disappear anytime soon as
pork from Washington tended to expand the regulatory advantages of passive index investing in bailed out zombies.
Market meltdown never lead to calls for reduced regulation and a reintroduction of contractual market making operations for individual securities?
The dire need for strategies to express humility about certainty & safety in the underlying direction of markets.
Stimulus, in simple terms, was the transfer of public wealth to the private sector balance sheets of zombies.

History doesn't repeat itself but it does rhyme.

March 2023 svb failed and POTUS spouted for more red tape, Biden -

 'regulators must strengthen the rules for banks to make it less likely this kind of bank failure will happen again'

J P Morgan & Jamie Dimon & Bank of England, Chief Economist, Andy Haldane, replied ...

6 Business Synergies  - Powered by Specialisation & Scale   

Bills must be paid! Balance the books!

Get it done! Grasp opportunities! 'Comparative Advantage' 'Total Factor Productivity' and 'Unilever Sustainability'!

Profitable projects are discovered in the unknown unknowns; picking winners is a mugs game, we're 'Open for Business'!

Economic growth came from synergies of specialisation & scale. Productivity. Innovation. Natural selection of 'know how'. 

Constant bias to the downside Torts (freedom to experiment without harms to others), Trade (synergies of specialisation & scale) & Technology (Empirical science 'know how' compound growth @ 3% pa)

Companies discover & accumulate valuable real income streams thru innovation, survival know how, desperately seeking difference, diversity, new niches, higher income & profits to survive bankruptcy.  increase real jobs economic growth  

Free & fair trade = global sustainability (economic liberalism) maximum cross-border economic exchange (no protectionism) where everyone pursues whatever activity they can do best to secure synergies of specialisation & scale.

Our market research suggests that global customers don't want production moved in order to circumvent regulations that codify existing democratic preferences -

treat workers fairly (not slave labour)

protect the environment (not plastic fishes, city smogs, Covid evil)

bills paid by innovative, efficient production (not protectionism, unlevel playing fields) 

Unilever's long term sustainability depends on satisfying global customers ... and global customers indicate they wish for free & fair & sustainable trade which does not abuse human rights to choose without harming others. 

Soaring equity prices in tech and other niche sectors are the 'short-term' trade of the crisis, says Mr Rochat.
'Longer term' many investors are realising that — even more than in 2007 and 2008, when we started playing with these EXPERIMENTAL FISCAL ECONOMICS. It is triggering a lot of questions now about what lies in the future . . . how inflation might make a comeback. Swiss bank UBS asked investors to pay it to hold their cash
Modern monetary policy is likely be adopted to inflate away the real value of the vast government borrowings.
Inflation must rise at a higher rate than government borrowing rises, which means holding interest rates lower than inflation. 2020 FED commitment to a zero-interest rate policy until inflation reaches an average of 2 per cent. But Abenomics has tried to get inflation going again for a generation by printing money but the third arrow 'structural reforms' stayed stuck in the quiver.
Albert Einstein described compound interest as the 'eighth wonder of the world' ... 'He who understands it earns it; he who doesn’t pays it' ... Paul Polman called it Unilever's 'compounding model'.
NB compounding works both ways ... losing just 1-2 % on cash in real terms 'compounds significantly on the downside' = opportunity cost.
Cash is only needed to fund immediate consumption to avoid a fire sale of income gemerating assets .. if and when borrowing becomes more expensive.

 

Under the soap pans in Apapa ...we learned about business and economics in the hairy 1970s ... we learned about the big inflation first hand ... from Brazil ... from Derek Holdsworth ... and from the leading Educational Charity ... the IEA    ����

Who owns Unilever's tax revenues? What an unseemly charade ... an ugly tax grab. Solvent competitive companies have to pay their bills. Unilever built an Inflation Accounting Manual mantra -

product pricing based on replacement costs
- the alternative of running out of cash and bankruptcy

investment decisions based on after tax discounted cash flows     
- tax increases costs, prices must rise to pay the bills. Standardised tax rates lowers output everywhere as 'productive work' pays the wages of defensive warriors & unproductive bureaucrats. 

DH used to ask, 'Where's my money?' ... and 'Who's money is it?'

Pacaoli's Double Entry Balance Sheet was all well & good but only a snap shot in time of a dynamic CAS of albeit audited judgments -

a trend is a trend just a trend ... but the question is, will it bend? ... will it alter its course through some unforeseen force and come to a premature end?

mark to market ... but valuations? timings? measurement system? currency? ... were US$s better? ... did we need a 'blockchain' of ownership?

In the UK a vicious spiral of high inflation, wage controls and labour militancy characterised the decade. In January 1974, in response to a strike by coalminers, Edward Heath, the prime minister, even declared a three-day week. First, came the inflationary fiscal and monetary policies of the late 1960s and early 1970s, the surge in the price of oil, labour unrest, failed controls over wages, price controls, and squeeze on profits, made worse by the failure to adjust taxation for the impact of inflation. Later, came the tight monetary policies of the early 1980s of Paul Volcker, chair of the Federal Reserve, in the US and Margaret Thatcher and her chancellor Geoffrey Howe, in the UK

The notion that inflation was a price worth paying for lower unemployment was rejected as a failed theory. central bank independence, to much of the world, notably including the UK.

The successful control of inflation coincided with the beginning of a prolonged and remarkable boom in asset prices.
The extended bull market in bonds was an automatic consequence of rapidly declining inflation. The success in controlling inflation was far from the only force driving this great bull market. It was part of a broader swing away from the regulated post-second world war economy towards free-market economics: the weakening of trade unions; tax cuts; trade liberalisation; financial deregulation; and the opening up of capital flows.
In a classic analysis, published in 2004, Harvard University’s Kenneth Rogoff argued that this increase in competitive pressure, some of it coming from China’s entry into the world economy, was a key factor behind the success of the disinflationary policy.

Shared ideas expanding debt structurally weak demand across the world economy. In 2005, former Federal Reserve chair, Ben Bernanke, called this phenomenon 'the savings glut'. More recently, former US treasury secretary, Lawrence Summers has termed it 'secular stagnation'.
Premature fiscal tightening and a weak monetary policy response, especially in the eurozone, led, instead, to a disappointing recovery and persistently sub-target inflation in the US and eurozone.
The lesson learned from this disappointing experience was that the response must be quicker, bigger and more determined next time. Covid-19, a quite different kind of shock, turned out to be that “next time”. It was met by extraordinary fiscal and monetary action, to stabilise the economy and people’s incomes.
with higher inflation and inflation expectations, they would be able to raise interest rates well above zero. This would give them more room for manoeuvre in future, in response to negative shocks.
run economies 'hot', with little fear of an unduly strong rise in inflation.
Politics has changed, too, especially in the US, with the election of Joe Biden as president. The ideas of “Modern Monetary Theory” — the view that the only constraint on monetary financing of government is inflation, which, in turn, is best controlled by fiscal policy — has won much intellectual favour on the left. So, too, has the conviction that there must be a rebalancing of the relationship between labour and capital, in favour of workers.
High inflation tends to distort the economy, partly because taxes are imperfectly adjusted for inflation. It will raise long-term interest rates. That will undermine the solvency of many debtors, including corporate debtors, as debt is rolled over.
Above all, an inflationary overshoot will trigger a disinflationary response from central banks. That will mean much higher policy rates. That could lead to waves of default
Japan, where decades of easy money has failed to ignite inflation

Why save for a rainy day?

7 Secular Stagnation & Stimulus - Powered by The Big Print - Financial Repression & Austerity

Secular Stagnation = artificial creation of demand for yesterday's production and distorting the demand for tomorrow's innovations.

Darwin's insight was 'natural selection', the weeding out of failures by bankruptcy of m & a. The Nation State 'designers' tried to go for growth by 'bailouts' and 'protection' from 'hostile' taker overs.

Financial repression, a government policy which channel funds from business to themselves to reduce debt. The overall policy results in the government being able to borrow at extremely low interest rates, obtaining low cost funding for government expenditures on grandiose schemes and stimulus.

Secular stagnation is a term coined to describe a prolonged period of lower economic growth. Secular stagnation is related to the concept of a liquidity trap. ... the idea that in certain circumstances low interest rates are insufficient to boost demand because of structural issues.  

Secular Stagnation = artificial creation of demand for yesterday's production and distorting the demand for tomorrow's innovations.

Economic growth driven by money or structural reforms ... or Three Arrows in Abenomics Quiver?

Abenomics did the easy bit; the big print. But there were three arrows in the quiver. The 'intention' was to pump money into the system to drive structural reforms not crate zombies. Slowing growth not increasing growth. The sequence was hubris, nemesis, catharsis ... necessary cycles on the path of 3% pa compound.

Six headwinds to growth - demography, education, inequality, globalization, energy/environment and lethal debt? ... was there a problem of maintaining adequate aggregate demand when growth was insufficient to reach full employment? when folk were less motivated/incentivised to spend due to fear (rainy day funds) or lack of excitement (obsolete products, commoditisation, running out of ideas, obsolete intra-generational jobs), inequality (no middle class bulge), inadequate infrastructure & education, longevity, old folk don't produce, 'limits to growth' as fossil fuels run out or degrade the environment.

Mellon 'purge the rottenness out of the system' Joseph Schumpeter’s theory of 'creative destruction', he argued this was the way evolution worked and the best way to ensure a recovery. Instead, the Mellon Doctrine helped turn the crash of 1929 into the Depression.

The miracle of natural selection is 3% pa compound not the ups and downs of the election cycles. Learn from Business synergies & Bureaucratic tax burdens

Stein's Law, 'If a thing can't go on for ever it will stop'.

Mark Carney, 'If it doesn't make sense, it doesn't make sense'.

European Central Bank Governor, 'we will do whatever it takes'

... to keep interest rates low to balance the books and keep zombies in business.

The EU books have not been signed off for years and years.

Why bother?

Fiscal & Monetary illusion of Command & Control.

Evolutionary Economics explains the idea of Structural Reforms - manipulation & distortion of prices cannot change folks minds ... production and labour have to be innovatively flexible ... 'micro dynamics' not 'macro statics' ... who pays? Winners & losers ... rewards AND compensation ... ?

Not gluts or queues for macro production / labour but rather micro gluts & queues for innovative production / skilled labour ... the measurement system could by anything from cowry shells to gold but it must be trusted ... and trust has a 'tipping point' ... instantly broken but painstakingly built.

The Jargon -

'stimulus' = 'pump priming', 'savings glut' = 'idle balances' = animal spirits, fine tuning, elastic bricks

'secular stagnation' = monetary excess, easy but largess goes into asset bubbles not 3% comp.

'Abenomics' = 3rd arrow after Monetary (easy the big print) & Fiscal (culturally abhorrent, save for a rainy day) was Structural Reforms (hard, work, honesty& thrift, innovation)

'go big' = 'don't let a crisis go to waste' = '1st 100 days', 'there's an election coming up', last time wasn't big enough 

'laser focus on growth' = by pass the blockages & let the blood flow

'get inflation going' = the hidden tax to avoid the impossible costs of raising interest rates & balancing the books, kills the productive effort and investments in profitable projects as Net Present Values of Discounted Cash Flows dwindle, messing up  the measurement system.

'structural reforms' = long term health spending in obesity & sloth or short term palliative interventions,

Trade Cooperation (synergies of specialisation & scale) not War Compromise (zero sum destruction)

False Narratives resulted in imbalances. Torts, Trade & Technology solved problems 

bureaucratic kludge  
 - drain the swamp - bribery & corruption - reform UN agencies - IMF, World Bank, WTO, WHO - funded with US $s became politised stinking with foul infestations - restrictive practices and restraints on trade -
Nikki Haley (UN ambassador) go for liberal democracy

mutual benefits of gains from trade
- confront China - tyranny & oppression - no price fixing manipulation - imbalances $s surpluses - Hong Kong
- confront Iran - Arab Israel peace treaties
- confront France - protectionism
Peter Navarro (Death by China) go for Doha 

trade globalisation
- specialisation & economies of scale - middle class bulge & inequality    
Larry Kudlow (free trader) go for synergies ... compound interest 

business investment in comparative advantage - synergies of specialisation & scale - low tax & principled regulation  
Steven Mnuchin (Goldman Sachs)  

trade trumps war - confront Iran & North Korea & French protectionism thru trade tariffs - Middle East trade cooperation 
Jared Kushner (Middle East Abraham accords peace) go for trade deals

free & fair trade update the global rules WTO  ~
Wilber Ross (Business Man) go for fairness of shares  

illegal aliens - border security - Mexico pays
General  (USA star General) go for law enforcement

patient choice - disruptors - project 'Haven'
Jeff Bezzos (Amazon) Jamie Diamond (J P Morgan) Warren Buffet (Berkshire Hathaway) go for innovation

defence and law & order
NATO costs
Defund the police
General Flynn (USA star General)

sustain essential cooperation thru good behaviour & moral sentiments help those adversely affected with jobs from business investment

Fraud allegations will continue to be pursued - relentless implacable resistance was out of bounds nadir baseless accusations of collusion with Russia - strongest and most resilient economy unprecedented progress - restored military strength - historic peace deals in the middle east - curbed illegal immigration & enhanced security of borders - advanced the rule of law appointed a record number of judges - operation warp speed deliver a vaccine in record time - tackled violent crime drug cartels Chinese exploitation - defended competition in market place - supported law enforcement men -

... all in place & unimpeachable since day one ...
why the false narrative? ... Barr & Pompeo

Economics 2016-2021? Trumpeting Brexit !

The wasted years, an absurd ginormous effort to reverse polarised 50/50 results of broken parliaments & voting systems thru the 'law of the land'.

Meanwhile - problems didn't go away? - opportunities were moribund?

Sumption - the law of the land cannot resolve 50/50 polarised beliefs. The Story of Charles I in 1649.

Carney - the manipulation of fiat money cannot drive real economic values. The story of Edward III in 1345.

Staring us in the face was the obvious fact of ignorance ... nobody knows whether the money print will be able to perpetually bail out markets? With interest rates already 0 per cent, the traditional levers of monetary policy may not be able to drive anything ... particularly caveat emptors ... and folk markets ... you can con some of the people all the time, and con all of the people all the some time but you can't con all of the people all the time?

Sure the patient must be kept alive until the operation is done
but the long term plan is not a reckless scalpel but rather a relentless evolution - speeding up adaptation to change.

8 Structural Reforms - summary of structural reforms

Structural Reforms focus on the real economy not the measurement system ...

= free & fair market economy = creating wealth for health, education and investment in the growth 'know how'?  

3% p a compound! Get growth done! Balance Balance Sheets! Eliminate bureaucratic barriers to trade! Innovation! Torts, Trade & Technology!

'Know how' evolved, discovered & accumulated through Empirical Science - observation, maths theory, hypotheses, experimental validation, peer review.

However 'know how' cannot be stopped or 'controlled' by nation states and stopped at the borders.
Ideas travel at the speed of light, innovation requires hard work, honesty & thrift.
Pascal Soriot AstraZeneca CEO said, 'our company has close to having capacity to produce 3 billion vaccine doses at sites set up around the world to prevent governments restricting distribution'
You can con some folk in some places for some of the time but never all folk in all places all of the time.
But don't despair ... of change, conflict, complexity & scarcity ... the dice are loaded ... synergies can be discovered & accumulated ... zero sum compromise and winner takes all is trumped by co-operation.
Contact reality and learn that Tit for Tat leads inexorably to cooperation.

Asset prices rise for companies with income streams generated from profitable innovation.
The bills must be paid.
You can't create money out of nothing.

Evidence from audited accounts of track records but judgments were involved -

Profit & Loss - timing?

Balance Sheet - valuations?

Cash Flow - investments?

Share price -

Growth - compound interest - but if a thing can't go on for ever it will stop you can't stop innovation

Future - non-linear maths - but if everything affects everything else you can't solve the equations

Brussels Stability and Growth Pact (SGP) was a set of fiscal rules designed to prevent countries in the EU from spending beyond their means -

state’s budget deficits cannot exceed 3% of GDP and

national debt cannot surpass 60% of GDP

failure to abide by the rules led to a maximum fine of 0.5% of GDP

In April 2023 The German Finance Ministry were still adamant -

'The reference values of 3 per cent of gross domestic product for the deficit ratio and 60 per cent of GDP for the debt ratio, first set out in the Maastricht treaty, must remain untouched'.

Sounded unbelievable & incomprehensibly good but look at the happenings ...

The SGP was mangled by member states in the Brussels bureaucracy, Maastricht was all 'pie in the sky' ... excuses were revealing -

rules were draconian

lack of compliance and

perceived favoritism toward certain nations 

And the big but was that Brussels never balanced the books as MMM waxed?

Germany produced the gravy with a low exchange rate, the French farmers et al wanted their 'fair share' otherwise they would tip manure on the motorways

Four questions -

Are obvious realities often ignored? 
David Foster Wallace! This is water! Something big has happened!

Do all realities change in different places, at different times, in different ways with different folk at different speeds? 
Herbert Stein! If a thing can't go on for ever it will stop! Money cannot be created out of nothing!

How does the maths of realities explain economic growth? 
Paul Seabright! Children are less intelligent and Grandchildren more intelligent than you! Money is just the measurement system!

Is the maths of growth always non-linear?
Michael Green! Beating the Index? You can can discover the patterns, you can't solve the equations! Compound Interest explains the growth curve!

Folk aren't daft, print fake money and the real value of real income generating companies will rise.

Rainy Day Funds are taxed twice?  Print? Asset prices rise! = inequality?

Crisis - folk will give not exchange    vaccines as  love & empathy? 

Trust - national currencies yes - but payment in Nairas?

Tax not needed?

Free Lunch! Each to his own needs each from his own capacity 

Why go to University and swot when we could be playing cricket??

There is no God behind every tree to help us. So forget all the shenanigans in political bubbles and stick to the knitting ... get on with the job ... learning ... but 'know how' is diverse, dispersed, tacit & incomplete. Empirical Scientists discover & accumulate 'know how' through hard work, honesty & investment.
1 The Knowledge  Base grows @ 3% pa compound but cycles with experimental discoveries & failures, excitement & fear, Hubris, Nemesis & Catharsis,
2 Tax discriminates, increases costs and reduces output
4 Zombie companies distorts, increases costs and reduce output
3 Supply & Demand measures cost / benefit

Keep focused -

Discovery & Accumulation of Synergies of Specialisation & Scale = 2 + 2 = 5

Personal Responsibility for Social Synergies

 But 'you' can't manage the rent seeking parasites and predators - the Chinese currency manipulators and the Washington Swamp.
Keynes spent during the downturn BUT saved during the upturn (cycle control) but MMT is spend spend spend with no 'austerity'.
'It’s helpful advice for some political universe that I’ve never visited' Krugman said.

Problem – Their red ink is our black ink.
‘the powers that be’ the Bishops, Princes, General & Bureaucrats
communicate thru simple slogans regurgitated in the BBC News & Daily Mail.
Very few folk will read the long complex mathematics?
Fewer still will understand it?

Polarised Voting & 50%/50%

Corruption & Bureaucracy

Drain the Swamp & Get Brexit Done

'restrictive practices'  & 'restraints on trade'

'resentment of cheats'  & 'fairness of shares'

Marketing Myopia    

Print money to help the kids get a job & a new house (wot a good idea! or is it simply bribing the kids to vote for you ����)
but how to stop the kids spending it to keep zombies alive?
Perhaps the search for the next Apple or Amazon ‘disruptor’ is impossible (too many candidates without foresight ����) ?
Wot about searching for the company that is ‘indisruptable’ ?
We wrinklies remember Theodore Levitt – ‘Marketing Myopia’ 1960 -

'Myopic cultures pave the way for a business to fail. The short term, short sighted, mindset. The illusion of a company in a 'growth industry'. Such companies focus on the original product and don’t adapt directly to the needs of customers'.

Folk need - Transportation NOT Railways - Energy NOT Oil – Communication NOT iPhones – Pictures NOT silver halide films etc
And in the case of Unilever NOT ‘Lux Toilet Soap’ nor ‘Magnum Ice Cream’ nor ‘Weetwoods’ but something that ‘tickles new fancies’?
I guess hearing, seeing, touching, smelling and feeling are all fancies that will always crave to be tickled ����

I’m off for my morning coffee ... please let me know if you find a good tickler ... CONTINUOUS INNOVATION ... commodities are cheap as sh1t.
(removal of pain qualifies as a tickle so pharma companies with pipelines OK?)

 

 

We know the argument, its like income tax ... just temporary until the panic is over ... same as 'fine tuning' used to be ... spend at the bottom BUT tax at the top ... the result is always distortion!

Evolutionary Economists didn't want a big print, furlough schemes, fuel stagnation ... all we wanted was to escape from hunkering in our bunkers and to get on with the job ... jeeze ... suggest greater urgency in seeking opportunity costs ... fantastical opportunities ... work in other industries.

Big print increased asset values and thus discriminated against the poor = inequality!

Big print distorted all incentives for innovation and commoditises productive outputs = Marxist myth that the production problem has been solved!

Zombie companies avoided bankruptcy and hogged resources which could increase productivity elsewhere.
Lethal debt as the tax system targets immoral equity. Equity financing has double taxation: you pay corporation taxes, and then shareholders pay tax on the dividend.

The value of stock 'rises if when a risky project pays off, but cannot fall below zero if things go wrong, so the CEO has a one-way bet'.
By subsidising the debt markets, we were able to avoid a liquidity problem becoming a solvency problem, says Mr El-Erian. That’s exactly what central bankers will tell you: we’re going to keep finance going through higher debt — and we hope that higher debt will be validated by growth coming back.

If everyone prints the same quantity the $ exchange rate stays the same?
Trade & Production continue!
Nobody balances their budget.
'Know how' continues to be produced by science and USA but China ??

Politicos and Politicking involve processes of hierarchical decision making intended to control the behaviour of members of a particular group or club.

A supernatural distribution of power and resources the antithesis of natural selection.
Results in zero sum compromise not positive sum cooperation.

Natural selection doesn't work that way. The mutations of change are random. Some differentially survive.
Natural Selection, the only game in town. There is no God behind every tree.
Evidence of Empirical Science. Suck it & see ... and remember

'From each according to his ability, to each according to his needs' Karl Marx 1875. The principle refers to free access to and distribution of goods, capital and services.

Or the Law of Supply & Demand.

Marxist view - the industrial revolution solved the production problem; an abundance of goods & services. A communist system will develop unfettered production, there will be enough to satisfy everyone's needs.

Five Myths - the antithesis of ignorance & natural selection -

class conspiracy = impoverish the poor by top down theft by command & control
Command Economies = no natural section reality - no Copy/Vary/Select, no Trial & Error Adaptation = Intelligent Design

imposed revolutionary solutions = elite dictators replaced by revolutionary dictators
Dictators = risks of Parasites & Predators, Tyranny & Oppression = Bribery & Corruption

labour theory of value = without reference to moral sentiments & trade synergies
Price Fixing = risks Cooperative Synergies, Economies of Specialisation & Scale = Gluts & Queues

nation states act in the public interest = no immunity from predators & parasites, tyranny & oppression, bribery & corruption
Nationalisation = risks of no Diversity, no Innovation, no Bankruptcy = Bailouts

justified by a priori top down logic = no bottom up empirical science
Dialectic Materialism = no Observation, Mathematical Theory, Testable Hypotheses, Experimental Validation, Peer Review = Ignorance

Innovation - 'time fraught with combating stupidity, jealousy, inertia, venom, furtive resistance and open conflict of interests, an appalling time spent battling with people, a martyrdom to be overcome, even if the invention is a success'
incremental, gradual, serendipitous and inexorable. It is not so much about one eureka moment as thousands of trial-and-error experiments. It is far more about natural selection than intelligent design.
Freedom to express counter-intuitive opinions and experiment
Very easy to find the failures in the hottest areas of tech investment, vertical farming, fusion energy, quantum computing, brain-computer interfaces and artificial intelligence, are all subject to healthy and informed scepticism.
Innovation captured by the powers that be and turned into an instrument of control? Rent seekers?

The celebration of difference & diversity is a core Darwinian concept not a Marxist Myth white bourgeoisie conspiracy.
We each choose where to invest-
#DefundThePolice and #InvestInCommunities
QE has wrought havoc on our economy and now the MMT response to Covid is using up our national balance sheet in further propping up the past. It was likely the best option in the initial stages given the uncertainty on how things would unfold but we now need to face the structural facts and spend the money on training, investment and frankly anything that helps create the future even at the expense of un-employment.

The IMF is clear that spending should focus on protecting the most deprived (ZOMBIES) as well as so-called 'high multiplier' areas (TECHNOLOGY), such as infrastructure, where it will boost growth prospects, in effect eventually paying for itself (GROWTH).

 

2001, 2008, 2016 & 2020 ESG Shocks !

1 ... 2 ... 3 ... 4 ...

dot com bubble (Kewill Systems & Tulip Mania)

trade imbalances (WTO failure & Real Estate) ...

polarising crowd trouble (Broken Parliaments & Fake Noos) ...

covid panic (WHO failure & Eyam) ...

excuses for continuing big prints before deficits were inflated away ... asset prices rise ... anything with a real income stream zoomed.

Result = Demographic Reversals - Democratic Deficits - Health & Education Crumble ...

Chi, Putin, Farage, Len Pen & Washington, Brussels and Westminster ... trouble emerged from beyond the pale, unedifying, narcissistic & ignorance, started to upset the status quo of self serving Bureaucratic kludge, polarising democracies as winner takes all uber alles broke politics ... and the law of the land ... as freedoms & minorities were trampled underfoot ... the big print tax grab.

Censorship, Amendment 1 free speech and Cancel Culture were triggered following an outpouring of hatreds as 51% tried to screw 49% with the big print.   

Top down elites clung on as dictators in Russia & China were exemplars but crowd trouble emerged as bottom up Joe Sixpack grew in confidence. Elites had unbelievably shallow victories and were scared, top down would fail.

Reversing the standard model as Dems & Big Tech went elitist and Republicans went Joe Sixpack.

Censorship was just plain wrong ... who decides? ... Who guards the Guardians? Darwin's insight was censored for 20 years!

Debate and await the evidence! Computer says no didn't cut the mustard ...

The Democratic Reversal -

Demographic shifts as a new global middle class emergence; African baby booms, changing nature of ageing & retirement; rise of women as entrepreneurs and leaders; challenges to cities; cooperative economy; future of money.

The inspiring idea was that humans were first and foremost social animals, as Aristotle argued. Successes always depended on synergistic co-operation.

Globalisation as China joined the WTO and USA middle class bulged with productive innovations AND rent seeking monopoly positions.

Deglobalisation & ageing reversed, generating inflation, higher interest rates, rising wages and falling inequality.

The 2021 Tax Grab !                

Steve Forbes - 'Don't fret about my wealth. I will do OK under any system because I own the 'know how' other folk desire. Focus on the poor'

'Restraints on Trade' - 'Restrictive Practice'.

Who owns the tax revenues?

Pillar 1  = stop the tax havens protecting filthy rich Americans. .

15% minimum tax for everyone to stop costly manipulation of registration location.

- % rate on wot? Profit judgment - asset valuations - depreciation - IP, goodwill, brands, human capital, amortisation, timing.

Definition of 'big' 'multinational' 'digital' companies.

Pillar 2 = discriminatory digital tax on filthy rich Americans.

Top Up corporation tax based of national sales at national rates. Needs agreements on 'double taxation'

All corporation tax increases costs and reduces output so reducing wealth & growth.

As 'big tech' was chased ... what about Unilever & HSBC? Intellectual property resides in the interactice hub bub in Unilever House and the networks of services and agencies ... IP had a 'physical presence' in the pubs and coffee houses of Canary Wharf and Silicon Valley? ... but sales were in China & Brazil eager to tax profits? Offsetting allowances for losses on investment? Patent protection of IP?

Open for business = competition for loopholes!

No profit, no investment, no innovation ... ? ... bills must be paid?

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Political Cycles - Tax, Borrow & Print -

Inflation Cycles - Nationalisation of Money -

Everyone messed with money top down while folk minded their own business, stuck to their knitting and got on with the bottom up job of hard work, honesty & thrift, discovering & accumulating value with the synergies of specialisation & scale

So we switched off the fake noos from the BBC and shut off the broken bureaucrats in Westminster, Washington and Brussels. We smelt a rat so we followed a strategy ...   

Us evolutionary economists guessed that it was 'know how' itself that was evolving so backing ignorance was a much better bet than blame ... especially about the future ... strewth we didn't even agree about history ... interpretations of happenings seemed to be many & varied & different for different folk at different times in different places ... and even the same folk seemed to flip flop between excitement & fear on a whim ...

'know how' was slippery ... complex, changing, conflicting & scarce ... diverse, dispersed, tacit & incomplete ...

Personal Responsibility from Empirical Science and Liberal Democracy was our only hope -

checks & balances

separation of powers

term limits

Bill of Rights, UDHR, Amendments 1 (free to choose) - 10 (lawful protection) - 14 (subsidiarity) 

and evidence from Scunthorpe - 

It seemed to us that if you did a double blind randomised control experiment in Scunthorpe which was repeated in the Antipodes 17½ nights later with the same peer reviewed results ... such was meaningful evidence not tittle tattle ...
and there was more everyone could discover evidence and accumulate 'know how' ... there were no restrictions on learning, there was no privileged access to 'know how' ...

Vote with your feet & join a club of your choice - discover & accumulate synergies of specialisation & scale from experimental hard work, honesty & thrift in a chaotic frenzied cacophony of happenings inspired by a 'free press & free association'

... but don't get it all wrong ... as soon as there were stocks there were thieves and parasites & predators abound ... defence and immunity from treachery did not result from creating money out of nothing!  

we were fed up with folk, who in their ignorance, arrogantly claimed to know what was best for us & for others ... and ...    

we were more well fed up with folk, who in their ignorance, naively expected someone ‘up there’ to know what was best for us & for others ... and take decisions for them absolving them from personal responsibility for a contribution!

In the end we knew everyone was bent on going for longevity in their own autonomous way with the help of family & friends. In the end it was the same for every country & every global company with operations across North America & Europe.

Personal responsibility and crowd trouble reverberated round the globe!

Einstein knew about night followed day and declared some folk had cracked it and were rich, others were mystified and paid the bills. The inflation followed the political cycle as night follows day.

 

Inflation went up, income generating asset prices went up, costs of debt & cash went up ... zombies were caught swimming naked.

Inflation was inevitable.

A tax few understood as Einstein suggested.

There was no free lunch all those bills had to be paid.

For sure things were expensive as prices went up but income generating assets waxed, companies with 'pricing power', followed the Unilever compounding model & inflation mantra ... 'always price on replacement costs'.

The growth curve was inflation proofed, a universal constant.

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Was inflation, the fairest tax of all, no discrimination, everybody paid the same inflated prices!

But then no tax was ever designed to be fair.

Taxes were raised to enable the bills to be paid.

But they never did the job, hence borrowing then then printing ... then the Minsky Moment ... and more bills.

The question?

How to avoid The Minsky Moments?

The human brain evolved to flip flop the hormonal balance between excitement & fear to create the necessary diversity for trial & error learning by natural selection.

Complex Adaptive Systems - no alternatives to ignorance as causes became effects - complexity, change, conflict & scarcity -

Biology & genetic selection -

Brains & flip flops -

Immune Systems & adaptive immunity

Science & know how -

Minsky moments were always instant flip flops in the brain ... flip flops between excitement & fear ... remember Long Term Capital Management who found instantly that there was no market and no buyers ...

 

 

 

 

 

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Libra to the rescue? -  

The horse had bolted?

 

 

 

 

 

 

 

 

 

 

john p birchall

back to some fun