Excerpt/Preview:

“Saving” is a “doing nothing” concept. When we save, we are doing nothing with our income. When desired saving increases, people want to do even more nothing. But there are 1,001 different ways of doing “nothing”. And it matters which one you do.

2) How can we manage the global economy so it does not hinder on the local economy of a small country?  I’m calling out Greece here.  Just stepping back and thinking – we do not have a robust global & national economy if the fate of Greece greatly affects financial markets (which in turn affects banks, who will not lend to businesses because of the weary financial markets, and then affects the unemployed, where businesses have no access to money to grow and employ).

Just some thoughts

This dude has put all his money into BitCoin – not smart, I would say.  Especially when news like a run on BitCoin hits. (If you have no clue on what BitCoin is, read.)

So while I laugh at the guy who invested all his money that is now gone, I reflect back on a conversation I had with a friend a few years ago.  Can we use this virtual currency to study monetary economics?  BitCoin has the potential to provide us with an interesting avenue to understand another type of currency.

But what I am imagining more is looking at virtual worlds and video games (disclaimer: I have no direct experience with video games) to build scenarios to “test” on live people interacting with the world/game.  Currently, there are trading simulators that follow the market where one can see how his/her virtual portfolio would fair in real life.  Add that aspect to a virtual economy and see how quantitative easing programs could affect it.

Just an idea.

Folks – for those of you that are unconvinced of Bernanke et al’s policies, efforts and commentary, I offer you Nobel Laureate Robert Lucas’ presentation made at UWashington a few weeks ago (I would have attended myself, but I was more engrossed in a Seattle Grunge-themed yoga class).

For the too long, didn’t read folks out there – Dr. Lucas compares the depression in the 1930s, while recognizing other recessions are not that comparable, to the recession we are currently experiencing.  While there are differences in the causes and prolongation of the two recessions, he notes that a big factor in both is the banking system, and the Fed’s monetary policies.  To note:

•In 1930, the Federal Reserve stood by and watched as spending and production declined

•In 2008, the Federal Reserve did exactly the opposite

•In August, 2008, there were $45 billion of reserves in the banking system

•By  the end of  the year, there were $821 b.

•The Fed acted boldly as lender of last resort, just as it should have done in 1930s, but failed to do

•Financial panic was over by end of 2008

•Too late to prevent deep spending declines in GDP in 2008-4 and •2009-1

•But there is a world of difference between two quarters of production declines and four years

He explains that the Fed did not do anything to help bank runs and the flow of currency in the 1930s, while the current Fed did the exact opposite.  The US has not technically been in recession since September 2009 (BEA) with [a seemingly shaky trend of] positive production, although it may feel like it.  Historically, job growth as always lagged after the end of recessions.  With Dr. Lucas’ comments, without the help of the Fed, we could very well still be experiencing decline in GDP/prolonged recession.

I actually wondered about this at my previous job: the Fed is increasing the supply of money, as seen in the increase in money aggregates.  But the purpose of this quantitative easing is to jump start the velocity of money – to get money exchanged more frequently through different hands (aka: people need not to save it, but to spend it).  These two graphs have confirmed my hunch, that velocity isn’t really moving anywhere.  But what made me curious is what happened in/around 1995?  The same sort of thing happened where the money supply was increased but the velocity didn’t take into effect.

M1 Money Stock

Money Velocity

It also got me wondering is that this is a frequently and widely known tool that the Fed uses to jump start the economy – increasing money aggregates/quantitative easing.  It’s also seen that it doesn’t have much effect on the velocity of money.  So, what can they do to actually increase the velocity of money as intended?  I wonder if it’s how the Fed presents itself when making and enacting these decisions.  Many people dislike the Fed with its ambiguity, perceived lack of hold on the economy, the tools that influence the public regarding the Fed (cough: Ron Paul). 

One thing that Dr. Robert Reich keeps complaining about is the two economies: one booming and the other still suffering.  The booming one, naturally, is the financial markets, investors, CEOs, Wall Streeters, etc.  The still suffering is the folks on Main Street.  It makes me wonder if those on wall street understand what the Fed is doing since the decisions, reactions and thought process is familiar to the folks that have a firm pulse on the market has some effect to its success, while the main street folks are lost in how quantitative easing really helps them.  What is seen for main streeters is the high unemployment rates, the losses in their 401ks, the nose dive of their home’s worth.  How can they even begin to understand the goals of the Federal Reserve when quantitative easing means nothing tangible to them? 

I’m not sure if my thought process or argument is coming across understandable.  I can’t be bothered at the moment, I’m sick.

My favorite part:

“For France, it is very difficult to accept,” says one French minister. “We have a tendency sometimes to treat Germany as if it should just accept our ideas, because that’s what France does. But that is over.” This means that French officials have to work out new ways of retaining their influence in Europe.

It’s been interesting to see how Ms. Merkel et al have been responding to its Eurozone issues.  The dynamic in the recent past has been that while they’re suggestions/intuition/actions may be right, they need to come off as not too right, or as the article puts it, being accused of unilateralism.  But as Germany’s policies break ahead of the pack in navigating through this eurozone & global recession, the country seems to have gained some well-deserved confidence.

One of them is actually a behavioral economist, and I looked up his book Behavioral Economics and its Applications on Amazon.  Here is what I came across:

Do the math – How absurd! 25 cents for a $44 book.  When, if you look right next to this ad, people are selling the book used for significantly more:

Why would anyone use Amazon buyback?

The irony of this being on a behavioral economist’s book page…

“The monotony and solitude of a quiet life stimulates the creative mind.”

I’m quite fond of it, and I think it encapsulates my current attitude.

While I am still adjusting to the horrific transit system in the Greater Seattle area, I’m trying to spin a positive on it.  I’ve been given the gift of time, woo…

So now I’m reading.  A lot.  But it’s great – I’m completely enthusiastic about enhancing the field of economics through borrowing from other science disciplines, i.e. psychology, decision sciences, physics and thermodynamics.  A while ago I came across complexity economics, which is based on complexity science and the notion that there is no sense of equilibrium within closed systems (the traditional view of economics) but rather open, dynamic, adaptive and complex system that evolves.

In an effort to educate myself on the foundations of complexity science (I am still trying to get a grasp on entropy), I picked up Deep Simplicity by John Gribbin.  With his digestible prose, I breezing through this, but fully involving myself with an eye for application with economics.  This sh*t is awesome!

More specifically, he draws up Lorenz and his discovery/development of the butterfly effect (coincidentally, or not, there’s a behavioral sciences/econ book called the Butterfly Effect that draws on complexity sciences.  I should pick that up again).  What was interesting with Lorenz is his discovery was that it is painfully difficult to forecast weather without the precise initial conditions.  Lorenz was playing on these new fangled devices called computers in the 50s when he made the realization that if he inputs numbers that aren’t precise, that is, that aren’t to the “correct” or appropriate amount of decimal places, the forecast/predictions will progressively be off of the more precise input in a nonlinear fashion.  If he couldn’t get the exact initial conditions (which would be decimal places off to infinity), he could not predict weather beyond a few days.

This is what came to be known as the Lorenz/butterfly effect.  I’m not sure how best to describe it…..so, I won’t.

My actual point is that I can see the Lorenz effect being applicable to the realm of economics.  First, it has to be impossible to model “the economy.”  Macro/micro economic models simply can not contain every agent, every being, every cent, every decision.  At best, models use probabilities and samples, and supposedly economists settle for this.  But as I read this book, models based on probability, samples and approximations are crude, so much so that it hardly gives a solution pointed in the right direction.  What if economists were to push the mathematical limits of the foundation of their science and rather than have the idea of economics be a social science, have a sense that it’s a hard science, like physics.

What if economics had the assumption of chaos, rather than equilibrium?

Oh.Em.Gee.  My mind is being blown and I <3 it.

1) Who else, other than other academics, reads this crap?

Yea I don’t think anyone.  The main reason being it’s difficult to understand without a rigorous economic education.  Who will understand econometric models or the method of choosing dynamic stochastic general equilibrium models versus Walrasian models?  Not many.

2) Why don’t writers care more about the “reachability” of their writing?

I say, status-quo, and to maintain a level of elitism.  If many people understood, then so goes their curtain of mystery.

3) Why are these papers so heavily bogged down by methodology of research?

Time after time, I read the abstract, intro and start getting into the nitty gritty of the paper, but I’m left with wanting more explanation, purpose and the question of “so what?”  What is the purpose of all this finely tuned research if it’s not being applied or used in some fashion?  If someone is researching the effectiveness of monetary policy, shouldn’t this research be actually _used_ in the Fed?  rather than published?

Here are my thoughts.  The research is very cerebral – economists can emulate mathematicians.  Often the reasoning, methodology, purpose, etc is obfuscated within esoteric language.  Therefore it’s not going to be easily understood within a greater arena, and then not utilized for the benefit of the field of economics.

I hope to break this cycle – produce research that is reasonably applicable _and_ understandable.  I hope to be an intelligible voice  for the field so as to make the education of developments in economics (i.e. monetary policy) clear to those who are interested but perhaps not have the background in the field.

A year or so ago I came across Inflation Targeting by Bernanke et al.  What I found interesting was the look at the overall market/public response to the German Bundesbank’s press releases after policy meetings.  If the Bank was not on target with inflation, Bernanke et al found that people respond better if the Bank had given a pinpointed estimate and was subsequently off target, rather than an inflationary range target.  The belief is if the Bank can’t hit its intended range, then it does not know what it’s doing.  But if it does not hit a specific number, then people are more forgiving.

It’s as if the Bank was playing darts with a large dart board versus a dime.  What, you can’t hit that target?  What a lousy arm.

The interesting thing is, the Bank could give an inflation target range of 2 – 3%, or a pinpoint 2.5%, and people would still be more forgiving of missing the pinpoint if numbers turned out to be 4%, even though the middle point of the range is equal to the pinpoint.

Hop across the pond back to the US, and people/markets have lost faith in the Federal Reserve as seen by the ongoing debates in DC and Wall Street.  How can we restore trust in our powerful reserve system?  Perhaps it’s similar to the Bundesbank’s understanding of how information is presented to the public.

I came across an interesting article yesterday from AdAge that documented a conversation with Dan Ariely, author of the popular behavioral economics book Predictably Irrational.  I’d like to see some combination of behavioral economics & marketing introduced to the FRB’s public releases.  One of Dr. Ariely’s comments regarding the loss of trust for a company & revenge:

Revenge is a useful thing because revenge allows for trust. If your computer crashes, you might get upset but you wouldn’t feel the same need for revenge as when a human being betrays your trust. The anger that can be caused by bad customer service is really kind of incredible. That’s the first thing that companies just need to understand. Things can quickly deteriorate to a level to which there’s no return. You can really calm people very easily if you do it at the right moment.

Replace “customer service” to “economic leadership” and “companies” with “the federal reserve” and I think there might be something there.

Bare with me, a series of questions: If the public/markets react poorly to the Fed’s leadership in trying to get us out of a recession, how is that going to be taken out on the economy itself?  If people distrust the Fed’s efforts, people must have a poor outlook, which must be seen still in restricting spending, use of credit, banks’ not lending, etc.  How does people’s mistrust affect the economy?  Does it interrupt monetary policy’s effectiveness?  Is there anything recursive going on to affect the progression of monetary policy?  Can we instill trust like that from the people of Germany (might I remind you the strength of the German’s economy…)?  How will faith affect the progression & effectiveness of monetary policy?

Are these questions viable…