NGDP and other Conflagurations

I would be remiss if I stated I was an expert on the specific schema available to attain a Target NGDP. I know that economist like to theorize about the various approaches a country or a central bank might take to achieve such ends.

They keep handing out a Nobel Prize every year to some economist that claims to have found some new insight on the inner workings of the economy.

Well, again I am no expert, but I do know this, when they were digging up the ashes in Pompeii, they found a casino, with the recognizable table used for throwing dice. Hmmm.

I know that every year a bunch of college kids take their first Statistics or Discrete math class, and promptly plan a road trip to Vegas. And, the lights stay on year after year!

I know Einstein put some thought into Roulette, and quickly came to the conclusion there is no way to win.

So, what is it that I know?

This, there are tried and true laws of mathematics. One of the earliest discoveries by Pythagoras is that numbers are just abstract symbols. That is what money is, it serves the exact same purpose as a number, in fact, over the years money has become impossible to separate from numbers. Money is nearly universally expressed in terms of numbers, which are themselves just symbols.

I dally a little in Physics here and there, what I have learned in those dalliances is that no matter what you encounter you can almost model any phenomenon into four basic descriptions, and everything else is some sort of interface and build upon of those basic models.

The two models that describe money as we use it today are buildup and decay. As you can guess, in any two party transactions one person builds up money, and that is exactly described by the decay of another person’s money.

What cannot be stressed enough, no matter what you want to think or how hard you laughed at or dismissed Romney when he said Corporations were people; it has to be realized that for the purposes of Money exchange, faceless nameless corporation are people, or at least the abstraction of people.

I know you are thinking they don't breath, eat and sleep, true but, when reduced to mathematics they are just symbols, they represent a piece of the mathematical model, they are either paying or receiving money. They are in a state of equilibrium based on the amount coming in versus the amount going out.

Moving up the scale whether on a national and global economy they all are exactly the same thing, they are able to be reduced to simple boxes in a chart with lines and arrows representing the flows in and out of the boxes.

In Physics, you have sources, sinks, build ups and decays that are in various states of equilibrium, in economics, and in your family life there exists the exact same descriptions.

Now, ask yourself, on most days when the weatherman states that there is a storm coming how often are they wrong? The truth is they are hardly ever wrong, in fact what we perceive as an error on the weatherman’s part is often just a fact of his accuracy not so much his precision.

There was a storm and it did move somewhere, it may not move exactly as far, or had exactly the wind strength, but on the grand scale of right and wrong there was a storm. What is the point I am making, if we can model something as massive and chaotic as weather and planetary movements is there any reason to believe we cannot do the same with money and the economy?

I find people are very good at taking care of what is important to them; I have met people that forget the children at school, but never ever seem to forget to pick up their pay check.

So, if we have established that money is way up there on the list of priorities, I would posit that it is safe to say man has long figured out the workings of his wealth.

The only people who don’t have their money under control are the people who never had any wealth to begin with, which is most of us in this generation.

I know you are thinking about the rock star, who is broke as hell playing at the local Indian Casino as your rebuttal, but I argue those folks are the wealth and not the possessor of wealth, by that I mean the record label owns them and the product they produce the music, so they may have had a large salary or percentage cut, but they were the possession, or that which is actual wealth.

Now some figure it out, I call him Paul McCartney, and they build wealth, some other examples of the enterainment variety are Oprah and Chris Rock, but when you figure there are 7 billion people in the world you are much more likely to hit the lottery than a rock star is going to end up wealthy.

So, man had his money inline and figured out a long time ago, and once he did that, then he was able to model the behavior of atoms and build the nuclear reactor.

I know you are thinking the economy is way complex with millions of transactions daily. True but in a small amount of fissile material, we can model pretty precisely what trillions of trillions of atoms will do, even though they are doing it in a completely random manner. So if a crazy haired guy with a slide rule can describe that, I am pretty sure, the economy is already very well modeled.

The trick is making everyone think the economy is not well modeled and well described, that is the trick, because then you can make up headlines that fit the behavior of what happened after the fact like it was some whim of the investor, or a lack of confidence. Instead of the very real act of knowing exactly what is going to happen.

So just like good scientist's do, let’s do a quick model of a double entry transaction, Something bankers invented a long time ago in Italy.

A double book entry is this. I am the bank and you gave me 5 dollars worth of gold to keep safe for you, and then I gave you a loan (also called a note (like Federal Reserve note)) for say 10 dollars.

For models you have to realize the minutest description of this transaction applies to the macro. My bank very much represents the entire banking system; the model is just as valid.

The little loan I just gave you very much models all the outstanding loans (currency) in the world. And the fact that you owe me 10 dollars is real and you are contractually bound to give me my money with interest. Interest is very special in this discussion, but I am going to ignore it in this first example.

So, you owe me 10 bucks, by Friday, I gave you a ten dollar note, if you did not spend the note, then paying me back will be very easy. You just give me the note back and all is settled. If you spent the note, things get sticky, you won’t have it, someone will but you won’t.

So, in order to pay me you are going to have to come up with something other than the note, I happen to like your horse, now getting you to agree to the horse after the fact will probably be hard, so after I realized what a pain it was to get the horse, I am probably going to ask for the guarantee up front, next time we will have to call it collateral.

Now, up to this point, I have proved that I can create a note, and use it to get actual wealth the horse. But there is another problem, what if the guy you gave the note shows up and wants ten dollars?

Well, there is a problem, I only have the 5 dollar, gold chunk, a 10 dollar horse, so I tell him he can have the horse for 12 dollars, and he sees the horse is well worth that, so the deal is struck. He gives me my ten dollar note, plus 2 dollars in gold.

So, I did nothing more than issue a note, and now I have 7 dollars in Gold. Not freaking bad at all.

Now the only thing that could have really monkey upped the pudding, was if the guy who ended up with the note showed up to my bank before I acquired the horse or other capital to make good on the note. That problem is fixed once, the note is detached from the Gold.

Now, here I don’t think, logic proceeded greed, I think greed went first, and interest was charged on the first loan, and it happened to work out that it created a faster flow of wealth in than flow of capital out.

But, interest is very tricky stuff; interest is what we call in physics an exponential function.

It behaves in a very particular way that once visualized you can realize how powerful it is in the control of the flow of wealth.

See in my simple first example, the exchange was a very straight forward addition and subtraction problem, now exponents are not much more difficult from a math perspective, but I think it is safe to say that people don’t really understand what they are and why they really hurt everything when it comes to their finances.

In physics, this is what a decay equation for a nuclear material might look like:

A_(t) = A₍₀₎ e^-kt

Where A(T) = atoms now

A(0) = atoms you started with

K = the decay constant

T = time

In physics K is the function of the Natural Log of 2, divided by the half-life of the element.

For your money K is the interest rate charged, divided by the compound period. I.E 10 percent compounded monthly.

What I am about to say is very important, it does not matter the interest rate charged so much, but more the shape of the function, in demonstrating what is going on. Here is a graph of decay of a radioactive element.

Yep that is your money on interest, now what I am about to show is that money is an abstraction, and what this really represents is your wealth.

So, back to our little 10 dollar loan, So, same scenario, your 5 dollar gold chunk is on deposit, I give you a ten dollar note, but, it has a ten percent per week interest charge, but I am a really nice guy and I really like you a lot, so I am not going to make you pay it back until next year. You are like, "Man that banker is so freaking cool!!!"

So, next year comes, and it is time to pay up. Here is how much you owe me, about 1420 dollars.

Here is where things get really slimy, since I only loaned you 10 dollars in notes that is all that is out there to pay with.

So, where or how are you going to pay me the other 1370 dollars you owe me? Well, that is a lot more than a horse and cart, in fact it is more than everything you have, so I will just take that, I will take you to court get an order and have the sheriff pack your ass off the farm, and now it is all mine.

Important fact to note here, money is an abstraction I don’t really give a crap how much you borrowed or how much you were worth, it doesn’t matter, I just want all or most of what you have. Wealth is a fixed value; it is the sum of the Earth. Money fluctuates as I need it to help me acquire all that is out there, I do that by getting everything you have and doing that over and over until I have it all. WOW, that sounds like a PONZI scheme!!

That is where a lot of people get lost in all of this, they focus on the dollar figure not realizing it is an abstraction, a diversion from what is important, money is paper, and a farm is not. I never wanted to get paper back, I made the paper, and if you give it back to me what am I supposed to do with it?

Wipe my butt with it?

No, I only care about real things, not paper. You got trapped by my paper, I have your farm and you still owe me 600 bucks so, in addition when you move to the city, and get a job, I am going to garnish half of that too until the debt is settled, or you file bankruptcy and discharge whatever is left, I really don’t care I got the farm, and now, get this.

I put your farm up for sale, for dirt cheap, rock bottom, and sell it on a mortgage with the same interest trap. Guess, what, now I got a farm that didn’t cost me anything, and now I got a sucker to work the farm for me and gives me most of the production, because every time he falls behind I threaten to foreclose and he refinances always giving me more for longer.

I love this job, and when he is too old I will give him a reverse mortgage, ensuring the farm stays mine for all time, ain't I a swell guy. I get sick everytime I see that guy from law and order peddling reverse mortgages on TV. Treason comes to mind.

I know you are like that is too simple, and you are asking yourself why you would even want the ten dollars in the first, place.

Yes, that is a little harder, and truthfully, I couldn’t actually pull this off by myself, so in order for you to want/need that ten dollars, I had to get the good King AlwaysBroke to help me out.

Now, he ain’t exactly ever met me, but he has heard I am a gold smith, and as such, should have some of the gold stuff lying around.

His factor contacts me, and says, I need to fund an expedition over to the new world, and the crazy ship’s captain wants some gold up front for provisions and what not.

I say no problem, I will give you my 7 dollar gold chunk, but I need a little favor in return, you see, I need people to get/want my notes, cause like, that is how I make my living and such.

So, like I need you to make a little decree that only my notes can be used to pay taxes or you are going to have the Sheriff toss the lazy bums.

I mean they shouldn’t have gotten mixed up in all this if they couldn’t afford to pay in the first place you know, silly irresponsible serfs.

King AlwaysBroke, is like, "That is going to hurt my people." True, but you know if those colonies turn out to have gold and other wealth what difference does it make, you can pay them back a pension. That is a great Idea! Let’s do it. Done, here is the gold.

Remember, those taxes!

So, the decree is made, and suddenly people are depositing their gold, and I am handing out notes, and a few people want money to start a business, so I write them a note for a little extra and so on and so on.

The point here is this, no matter how large or small the economy, once I charge interest I create a situation that ensures at some point in the exchange process, someone is going to come up short, and if I don’t continually loan, everyone will come up short, because the exponential nature of interest.

Now let’s look at the bank's model.

The opposite of decay is growth.

A(T) = A(0)* exp(1-e^-kt)

From the graph you can see how quickly I am getting rich compared to how fast you are getting poor.

As, you can see on the right hand of the graph things get to a point where I own everything and you own nothing.

As far as our economy goes, that is pretty much the situation and it has been that way for at least a hundred years. With some fluctuations around the World Wars.

Now, there is a huge problem with that, you are not going to keep suffering and working that farm, if you get nothing and I have everything. You are going to come burn my house and take your stuff back eventually.

So the lesson I have to learn over the years is how I keep things moving such that I have everything and you have nothing, and you don’t kick my door down.

Well, that isn’t an exact science, and that is where the heavy thinking comes in, and the need for the Nobel Prize. Without, some kind of system that keeps the gerbil on the wheel, things will go to back to equilibrium quickly.

The cool thing about it though is this, I have been making deals with King AlwayBroke for a long time, and well it was really him that made the rules on the taxes, and well it looks like his war didn’t quite pay off as much as I had calculated, oops. Yeah that's right in addition to banker I am now the Chief Economic advisor to the King, the expert on all things fiscal!!

Anyway, all I can do is lower interest rates and refinance. After all, it was the King that screwed this all up.

He is the one that better figure it out. Because we all know the current regime catches the first and the worst, and rightly so, because he did make a deal with the devil.

But, not to worry, though, I see a bright and upcoming movement, a group of young firebrands, that want to run the country for a while, I will give them some gold to help them out, you know just a little to get started, of course I will need a favor later!!

So, back to NGDP, will it work? Yes, I think it will, but I believe that giving people on welfare million dollar checks will do the same thing. In that Targeted GDP is just another spin on Keynesian economics. The fact that Paul Krugman has put his blessing on the idea pretty much shows it's pedigree.

But, I know that neither Keynes nor Milton inspired schemes will fix the problem as long as the bank is manufacturing the money and charging interest. True these schemes will put money into circulation. But that, is all that it is, circulation, like a vortex that sucks real wealth and real people into the depths.

It will keep me busy with my newly minted company that I bought from the bank using bank money to purchase it, paying my employees so they can start paying their credit cards again, and making those car payments, and of course all the Dad's that got laid off that were racking up Child Support Arrearage, money that never existed and is charged at 10 percent interest.

Long story short the bank owns it all, they can shoot for a targeted GDP by different methods, and they already are doing it, QE, student loan forgivenness, Fannie selling blocks of houses to investor to convert to rentals (Mostly Dubai and China).

The only reason NGDP is getting buzz on the blogs, is to make it look like the government is smart by doing these things that it would already have to do in some form or another, or else the country would decay into open revolt, granted it is getting close, so I suspect there will be a ramp up in these measures, and of course good economic news in terms of growth that will be corrected 9 months later to the real value..

The other fault I find with some of the methods being proposed to target the NGDP, is this. The only ideas being passed around are various forms of Federal Reserve asset buying and selling.

This has a couple of real flaws, the Federal Reserve is not the government even though all the people in the columns and blogs continually make the inference. Secondly, only the ultra wealthy have assets. So, how is this different than a tax break or a grant or whatever you want to call it for the wealthy? This creates a situation where you can close up the tax code without making a dent in the outflow from the wealth. It is like saying, don't worry your problems are solved you no longer have to bow to the King, you can just merely courtsy.

The Fed is printing money and giving it to the wealthy any way you slice it. It is a weird Keynesian Reaganomics hybrid. It is Keynes, in that it represents the Fed spending money to increase economic activity, it is Reaganomics in that the activity is for the rich and the rest of us just get the crumbs again.

Another thing funny on the timing of the subject, is the Fed has the charter and thus the authority to regulate the money supply, they can do it however they wish, the only reason they tie it to politics is so the government burns when the inevitably reality of poverty sinks in to a large enough portion of the population to become a threat to the equilibrium. By that I mean, out with the Dems, in with Pubs, out with the Pubs, in with the Dems. It's like a made for TV drama, wait a minute!

Sadly, if these efforts work, and I have no reason to think they won’t, it will only pacify the people, and as usual they will do nothing to change what really needs to be changed, and that is USURY must die!