Wednesday, April 9, 2008

a + b = \

As even optimistic analysts now believe that a recession is upon us, the debate has shifted to its "lettering": will it be a quickie in-and-out (V), a more prolonged (U), a double-dip (W), or a Japanese version (L) ? My opinion is somewhat different and is not described by a letter, but the - aptly named - slash (\). To wit, I believe we are in for many years of painfully slow contraction, akin to a maddening Chinese drip-drip-drip torture.

The reasons for this view are:

(a) The elements dragging down the economy are deeply-rooted and fundamental. Huge debt, low earned income, zero saving rate, resource depletion and climate change cannot be reversed by a "mild purgative" recession. If left completely unattended, the economy would go into a tailspin (|).

But, at the same time:

(b) Monetary, fiscal and political authorities, steeped as they are in decades of Keynesian and central banking traditions, will be confident of their abilities to cure the economic cycle's weakness. They will keep applying their customary medicines to stop the decline, with some temporary success. If that was all, the economy would go into a flat-line ( _ ) or a slight uptrend (/).

But because of (a), this slowdown virus will prove far too resilient against the usual treatments designed to combat the common economic flu, and the decline will resume until a completely different set of doctors take over and prescribe the necessary radical treatment.

Symbolically, then: a + b = \

or, if you remember your vector physics: | + --- = \

P.S. Crude oil hit $111 per bbl today. One hunnerd an' eleven... them's a lot of castles in the sand for all the khalifs (with banners flying from their "Peaks"?).


  1. Your physics talk is a little above me, but I think I get your point. But at some point a fundamental level will be reached. Aging infrastructure will need to be repaired, that will create work. A new infrastructure should be created, that will also create work.

    Innovation will also come back and demand for "the better mousetrap" will be created at some point. The question is: how will we create the new demand? We have already tried the "trickle down" method and it certainly won't work when we have such a huge disparity between wealth and poverty -- not to mention that wealthy folks are savers, not spenders. Any fiscal stimulus directed at them will go to things that will have no application to the hoi polloi.

    No, we need a new paradigm. I think that what you have talked about before -- namely, the new energy based on solar energy -- will spur a whole new line of innovation (better photovoltaic cells, better batteries, better windmills, etc.).

    Some people suggest that we need to start a war to put people to work. I think that is also "old school" thinking. We need to be patriotic about something other than war.

  2. I agree that the current crisis will not be resolved in a year or two. Your thoughts are consistent with those of Mish, who thinks we will drift in and our of recession for three to four years, in a "WW" pattern.

  3. Hellasious"

    "--- + | = \"

    That's in the universe that we are experiencing. However, in the slightly parallel universe of the beltway, the equation is more like,

    --- + --- + | = /

    Needless to say, that "slightly & parallel" are the qualifications for getting sucked up into Big Bertha and I don't have to tell you which end they are heading into....


  4. I've been saying "down staircase" for the shape (or maybe a classic zig-zag). In addition to the economic fundamentals, oil prices are going to stay high, because global oil production is declining. Any hint of increased demand from an economic recovery is going to drive oil prices sharply higher and strangle the recovery in the cradle. Even if there is no recovery, oil depletion will eventually drive prices up as supply declines.

  5. Financial. homebuilders sectors along with the luxury consumer economy financed by debt face a longterm decline in the US. The next part of the shadow economy,(War making & related Defense spending ) also face a ecomomic slowdown as our ability to fund a world wide military network of hundred's of installations and various regional wars come to an end. Changing our economic structure to account for these changes will probably take a lifetime or two.

  6. okie, the vector part can be explained like this. Think about walking one block east. Then walk one block south. You are now southeast of your original position.

  7. Good stuff. One observation: I think that the final equation in the original post has the first two terms reversed.

  8. Thks for catching the typo.


  9. I think everyone is too optimistic, actually. I'm expecting this trough to run at least five, but maybe ten years. A bona fide depression, which will create the environment for the paradigm changes okielawyer discusses. It will take at least that long to defeat the mindsets that got us here and allow for acceptance of the thinking that will fuel the next upturn.

    I'm a little surprised that commentators like Mish and yourself stack up all the systemic disasters in the making and come to the (very) relatively 'rosy' projections you do.

    But then, my former co-workers probably didn't call me 'The Dark Prince' for nothing. ;-)


  10. We seem focused on when we will return to normal economic times and what symbol shape the return will take. But I worry that by "normal" people mean permagrowth. That can't happen. Too many have spent to capacity (using 100% income and debt available). So something dramatic is about to happen to lifestyles. It could be a peaceful scaleback or it could be global cannibalism (see Dark Prince? We're not always rosy). As Okie wrote, a new paradigm. It would be great to have a visionary leader to have thought out a new paradigm that we can all jump ship to instead of just accepting whatever order seems to rise up out of the chaos. Anon- it won't take a lifetime or two. History is full of examples. Five years, tops.

    Thai-Can't find the Colbert link, hopefully I'll catch it in a rerun.

  11. Maybe we should look at the economic progression as the non-productive parasite- productive host dynamic. Surely, banking is a very useful endeavor to a point passed which it becomes essentially a drain on economy as a whole. I read somewhere that 35% of the work force in New York City is employed in banks and investment houses; New York is a big city – that’s a lot of people! Assuming the same relative proportion of finance versus the rest of economic activity applies to the whole economy, that seems like an excessively large amount of “labour” devoted to a sector that ideally performs a supportive role.

    The problem then is in essence that the “malnourished and shrinking” productive host can no longer support the burgeoning and demanding parasite. Malnourished because income has not risen, shrinking because people either fall out the workforce or strive to join the lucrative financial companies.

    The future dynamic is obvious: the financial sector must shrink. I have not heard of massive lay-offs in banking and investment. The problem has not been address yet.

  12. Hell, from your December 12, 2007 posting oil should now be more than 7% of GDP (a quick check on Google finance indicates a 17% increase in the price of oil since that posting).

    Oil only needs to increase by 14 dollars and it will represent an all time high as a % of GDP (and that assumes no GDP contraction).

    @Okie- who said we need a war? Having said that, I just returned from a three hour lecture by a local Baltimore 'populist liberal Democratic economist' trying to explain to me why America needs a 'Berlin Wall' on the boarder with Mexico; always good for cooperation and trust.

    @Dink- I completely agree the permagrowth model needs to change and agree even further there is no such thing as 'normal' or equilibrium (impossible to ever reach equilibrium in evolutionary systems).

    But I tend to think you are really delving into an area traditionally managed by religion (I am not religious). For (in my view) religion has traditionally been 'the glue' by which societies have come to agreement on issues like this (I am not saying it is the 'only' glue, nor am I saying it is the 'only way' we can get similar glue).

    In reality, conflict and cooperation have always been about boundaries, and one of the most postive aspects of religion (indeed I think the aspect that has encouraged both the growth and evolution of religion thru history in both society and human beings biologically) has been religion's ability to get people to expand their 'boundaries' and see newcomers/differents as 'kin' and thereby improve cooperation.

    @Teleck- ALL roles/jobs in society are supportive. Get rid of illness and we don't need any healthcare workers. Create new transportation paradigms and we don't need auto workers. Create robots and LOTS of manual work, manufacturing jobs go away.

  13. Okie, regarding your rich-poor savings nonsense...

    The chinese live on 1/10 the amount Americans live on (numbers not exact) and yet they save nearly 50% of their income (again, numbers not exact). Or do I need to remind you of Oseola McCarty, one of the greatest Americans of all time?

    The only problem is your bouondaries-- are your peers 'all of humanity', or are ythey just Americans/Western Europeans?


  14. Some say a slow and lengthy recession and others say a full on depression.

    It's early days in this downturn, and by my runes I'd say we've been in recession since the fourth quarter of last year. But I would tend to agree with whoever forecasts a depression over a recession. Believe me, I don't want to subscribe to that view, but intuitively, for starters, a recession amounts to much too much good fortune to be believed except in a Hollywood movie, perhaps.

    One thing folks need to remember, The REVOLUTION WILL NOT BE TELEVISED. There is no doubt that the full scale awfulness will not be given its full due by the PTB and MSM, so assessing just where we are, and how we are doing at any given time will be difficult to assess.

  15. Just like we had a 'jobless recovery' before (remember that one?), at the moment it looks like we may have a bear market-less recession this time.

  16. Edwardo, cooperation is a funny thing: it can turn off or on in an instant.

    As Xenakis said, we need a 'regeneracy', hopefully one not linked to war.

  17. Thai:

    Really now, "nonsense?" When a hedge fund manager makes $1 billion per year (taxed at 15%, as opposed to ~33% for a laborer), that hedge fund manager spends what percentage of that wealth? Maybe 10%? The rest gets put into investments to provide a "guaranteed income for life." And what they do spend is on frivolities. Then it just becomes waste. Eventually you end up with two many dollars chasing too few investments. That is also waste.

    Sounds familiar, does it not?

    You want that money churning through the economy where the poor, but smart and innovative entrepreneur invests it in marketing "the better mousetrap," or societal investment in infrastructure and social justice. That leads to much less waste.

    I'm not saying that I wouldn't a moment or two of cognitive dissonance if I had the opportunity to be a hedge fund manager; but that still wouldn't mean it was just.

  18. My humble apology, as I hit the 'publish' button I realized I read much more right wing extreme than I actually meant (I'll admit on this day only a tendency towards this from time to time).

    My point was just views on savings and consumption are really all a 'state of mind' (that boundary issue again)-- heavily influenced by our social values, institutions.


  19. Hey Edwardo! I just got this on my Kurtzweil RSS blog feed and thought you would get a kick out of it.

    It looks like fractals will make me do it!


  20. "bear market-less recession"



  21. @Thai

    I'm not religious either, but I will give religion credit for being able to remain in authority over groups for very long periods of time (sometimes without overt tyranny even). I used to think people were drawn in by the lure of an afterlife, but I'm starting to think that the social aspect may be the real key.

    (Mind wandering...)Groups of 50-100people meeting up once a month or quarter to do civic-minded, "regenerative" projects like planting trees, installing solar panels, etc. Some hierarchy with responsibility for organization, establishing a system of ethics, and monitoring the herd for predators.

    Move over, L. Ron Hubbard, I think I feel a calling....;)

  22. "Monetary, fiscal and political authorities, steeped as they are in decades of Keynesian and central banking traditions, will be confident of their abilities to cure the economic cycle's weakness."

    I'm not sure this is right. Looks to me like the Fed and some parts of the Executive Branch are frantic with fear. They (or some of them) aren't dummies. What they've tried hasn't been working very well, and they know it.

  23. Just reading Kunstler's 'Long Emergency'.

    Add Global Cooling to the financial/resource depletion mix, and I'm not sure that we aren't seeing the start of what Kunstler so bleakly envisaged...

  24. Waymad,
    I'm also a fan of Kunstler's CFN world view and I can easily see civilization pulling a global Easter Island on itself (or any number of other vanished societies). I've talked till I was blue in the face but I can't convince any friends or relatives that a potential catastrophe is a real possibility. No one wants to inconvenience their lifestyle until they're absolutely certain that the calamady will arrive on schedule but by then it will be too late to save substantial numbers.

    Since wealth creation is impossible on the level of the individual without the structures of society, why do you object so strongly to society making greater demands on those who occupy the higher rungs of that society and benefit disproportionately from those structures? Without the patent and copyright offices Bill Gates would be no richer than the next guy so it only makes sense that he contributes more to the upkeep of the source of his wealth. An additional consideration is that touched on by Okie, vast sums of idle wealth is highly destablizing as it chases after yield distorting and destroying real economic activity not to mention the often corrupting influence of inherited wealth on those who receive it. They often begin to see human life (of those beneath them ofcourse) the same way a lion sees a herd of grazing zebra.

  25. Interesting Thai. Bloody damn fractals. It turns out the universe has no imagination and/or it's afflicted with OCD. Shakespeare was right, What's past is prologue.

  26. Yoyomo, you completely misunderstand what I am saying. We are looking at this from a different frame of reference.

    I would agree with what you say were I not to believe something else Okie believes as false: Pareto (fractal) distributions are fundamental to evolutionary bounded networks!.

    While Pareto (fractal) is not fundamental to every network type, it is to the network type that matters most to you and me: human society/wealth.

    No matter how much you try to 'break' or 'change' a society's network or architecture, as long as fundamental boundaries still apply, the fractal/power law/scale invariant nature of the network (society's wealth) remains constant.

    Translated-- you can't change wealth distributions within society no matter what you do. There have always been/and always will be, rich and poor.

    No amount of taxation can change this structure in society. Even 'communist' countries have the same wealth hierarchy... where once upon a time in China the children of the emperor owned/controlled everything, today ownership/control has passed to the children of the communists, etc...

    This structure is as immutable as gravity.

    But notice, while I said the underlying network/ architecture of society is immutable (it is a fractal and therefore scale invariant) individual people within society change places in the wealth network all the time!-- this is why ALL of us have stories of deceased relatives who were both fabulously wealthy and fabulously poor.

    Yoyomo: What is 'idle' wealth????? I do not know many wealthy people who would remain wealthy if their wealth were 'idle'. Are you sure you don't mean: "they need to spend their money on me"! Depending how it was 'spent', this might be a great investment, or it might be a total waste.

    The real issue is how a society/people spend their money: will it be 'invested' in productive ways (say developing a cure for cancer so people can get back to work) or will it be 'wasted' in unproductive ones (more time on the golfcourse, larger homes with 5000 count sheets, more time staying at home watching TV, etc...).

    This issue is completely different from wealth distributions in society. Last time I checked, the wealthy want to make money. They may invest their money badly and thereby loose it, but we all know foolsihness is not the sole province of the wealthy.

    As for 'those beneath them': "yes", now you and I are seeing much more eye to eye--I could not agree more.

    But again we MAY see this differently. People will only cooperate with those they see as 'kin' (existing within their moral boundaries).

    I don't think a social structure based on resentment is the best way to solve societal cooperation issues (just look at the way the working poor in this country ('rich' by foreign standards), treat working poor immigrants trying to find work).

    This is where we need to focus. This is what I see Xenakis' meaning when he says we need a 'regeneracy' to catalyze social cooperation.

  27. No Thai, I don't need anyone to spend their money on me but, not being a mathametician or philosopher, I don't share your faith in fractals. The system we have is based on strenuous efforts by the elite to maintain starting with the corruption of the education system so that minds of the populace remain sufficiently mushy to mold as the situation warrants even if diametrically opposed to the position advocated the week before. It's no accident that students are crammed with equations and chemical formulas that 98% will never remember past mid-terms but are not taught analytical thinking or even mundane matters such as how to handle credit. If you have money then you get low rates for credit to keep your account but the moment lenders get a wiff that your short then your rates sky-rocket safe in the knowledge that you can't pay off the balance. Just for the record, I'm lucky to have never had to borrow so this isn't sour grapes on my part but it does offend me that lenders have in the past 25 years been let loose to prey on the unfortunate in ways that would have gotten them thrown in jail previously. If you pay your phone bill a couple of weeks late your car insurance and your loan rates shoot up. That is pure and unadulturated exploitation. It's also no accident that cash strapped localities always manage to find the funds for sports arenas and it has nothing to do with a healthy mind in a healthy body if you remember that slogan from a ways back. I've always felt that the lottory was legalized so that if enough of the lower classes could be conned into believing that they had a shot at becoming millionaires they could be suckered into voting for tax cuts for the super rich.

  28. Yoyomo said "I don't share your faith in fractals"...

    Your only issue is the following: if you do not have 'faith' in 'fractals' (we are using the term here to really mean something else--science), you also don't have faith in the conservation of energy, etc...

    Yet it was this same 'science' that built the A-bomb and the computers we are communicating over right now.

    In a way, we each have a kind of 'schiophrenia' when viewed by the other... I wonder who lives in the 'real world'?

  29. Last thought on this topic;
    if fractals are so immutable, then why doesn't Sweden have an exactly identical wealth distribution curve as the US? For that matter, why doesn't the US have the same curve it's always had since before it was born and which has never varied by even an infinitesmal smidgen irrespective of any changes in tax and spending policies?

  30. Yoyomo... You ask a VERY good question (Okie implied this same question the other day).

    I can't give you an exact reason since I don't know (econophysics is not my profession). I can only share my thoughts on possible explanations not knowing if they have been validated or disproven or represent a total misunderstanding of the issue-- if you ever learn more I would LOVE anything you come across.

    1. Wealth is a lot more complex than just how much money/financial assets one has. The Pope could be viewed as one of the wealthiest people in the world in terms of social structure, but he probably does not own very much in actual financial assets.

    Think about the 'wealth'/'value' of things like: reputation, longevity, fecunditiy, health, happiness, etc... People pay money (sometimes a lot) for these and other 'intangibles'.

    If you ever read Freakonomics, Levitt quantified in the internet dating world that being blond is worth more to a woman than a college education (we live in a truly bizarre world???).

    We have no good way of measuring 'intangibles' like we do with GNP (money is easy to measure).

    2. Within the global networks there are 'micro networks' (did you read Nassim's thesis in "Fooled by Randomness"?). The global economy is vast (and global!). People tend to look at their country's Pareto wealth spread (described by the 'Ginni' coefficient) and somehow think their country's spread exists in isolation of everything else and can therefore be meaningfully benchmarked against another country's Ginni coefficient.

    Yet this is scientifically problematic at best (a little like comparing eagles and octopi) as each country exists within a completely different 'ecosystem' within the world economy. So for instance, one country's trading partners may be much wealthier on aggregate than another, etc...

    3. Genetic interrelatedness of people within a country may effect the Ginni coefficient (though I tend to think this is probably not an explanation or we would not see Pareto structure within our own bodies-- yet we clearly do (i.e. Brain 'wealthier' than appendix, etc...).

    4. Small random sample sizes (even at the level of nations--- Scandinavian nations are an infinitessimal % of the world's population) can make things look different than they truly are (for example, if you lump a group of physicians in the same practice together, their income spreads might be look fairly narrow, but add all their support staff, etc.. and the 'spread' within the company changes).

    5. There is never any 'equilibrium' that a ginni coefficient can reach over time... spreads within a single country can seem wide in one time in a country's history, narrow at another time and then either stay constant, narrow or widen in yet a third time point in history.

    Nor is it entirely clear to me that comparing one country at one time in history against another country at exactly the same time in history is in any way a valid thing to do scientifically.

    Yoyomo, if you talk with people from countries where the ginni coefficient is small (Denmark and Sweden) and ask them whether their country's have a similar social structure ('have mores' and 'have less'), they will clearly say 'yes'.

    But again, to be honest, I really do not know.

  31. ... Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions - everything, now
    restrains itself and anxiously hopes for just two things:
    bread and circuses

    Decimus Iunius Iuvenalis

    Jason B

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