QE – Our take on the Bell Curve effect

Making sense of the distribution and lag effects

Let us explain the problem or rather challenge of choosing between Quantitative Easing (QE) and an Interest Rate reduction to stimulate economic activity, with reference to the Bell Curve diagramme above:

There are two major factors at play here:

1. Distribution
2. Time

With a bout of QE, the effect feeds into the margins of theBellcurve and it takes time for the distribution network (money supply chain) to filter the new enhanced supply into the economy at large.  So there is both a distribution and time lag effect with QE.

On the other hand, with an immediate Interest Rate reduction, the effect is to cover the larger middle ground of the Bellc urve more instantly.  Yes, it does depend on your wealth and debt holder structure too, but both borrowers and savers feel the effect more immediately.

But, with Interest Rates currently so low, this option is not really that feasible. With inflation running at between 2 – 5% depending on which side of the pond you are, effectively savers are paying an additional ‘tax contribution’ to the Treasury by this stealth means.

So we are back to the scenario of a tax on the stock (or wealth) of the economy, as most flows have dried up.

Therefore, join the happy queue over here.

 Image from: http://agilepartnership.com/blogit/wp-content/uploads/2010/06/sadHappy.jpg

 theMarketSoul ©2011

Recapitalising Europe

Forget about recapitalising the French Banks, saving Greece, (or the Euro)….

Euro Dominoes

Continuing our conversation on Innovation

Yes, we admit it! The headline statement above is all about grabbing your attention.  We are not advocating any disorderly default crises.

What we believe is that the ‘agricultural’ economic base and the semi-integration of Europe, via market and monetary union, without going the full circle of political and fiscal union as well, has at this point failed.

Not that a major concerted (and concentrated) effort to ensure it does not fail will end in failure itself.  But has anyone really asked the question:  At what financial cost?

 

If an US Treasury Secretary, Timothy Greitner, has to take the unprecedented step of flying across the Atlantic to come and join a European Union Finance Ministers meeting, then something big must be on the cards!

Is he going to come and tell Germany and France in person to just let Greece go?

This reminds us of a stanza from Felix Dennis’ poem “How to Get Rich” about timing:

“Good timing? To win it
You gotta be in it.
Just never be late
To quit or cut bait.

 This might just as well be the message for Europe:  How not to get Poor.  The key words are “Never be late to quit or cut bait”.

What we believe is happening behind the scenes is the planning for an orderly default mechanism and Euro ‘disbanding’.

The more Angela Merckel’s resolve hardens around saving the Euro, the less we believe Europeans themselves are warming to this concept.

 So what about Innovation then?

  

We started this article with the intention of continuing our conversation on Innovation.

So, what we mean by Recapitalising Europe actually is related to addressing the culture of decay that has enveloped Europeover the last few decades.  If Europe is referred to as the ‘Sick Man’, then there must be something behind that statement.

And we believe that it is the general lack of support for invigorating Europethat is a key driver.

What do you mean, we hear you ask?

In the quest to unite Europe, we have built a framework of a European parliament, a Council of Europe, a judicial system, etc. 

With these institutions have come regulation, rules and edicts.  Sometimes messy, sometimes helpful.  But at this juncture, we are so overrun by nonsensical regulation that the will and spirit to be creative and innovative has drained away from the general citizenry.

This is a very, very sad state of affairs.  The young European citizens have lost their ‘psychological contract’ with the wider Europe and European integration goal.  High rates of youth unemployment across Europe is breeding a generation of disengaged European citizens and ultimately is an opportunity and efficiency waste in the medium term.

But how do we Recapitalise a spirit of Innovation in Europe?

This is a key question we are going to ask of our network and as part of our general ‘outreach series’ and report back on our progress towards establishing an Innovation Framework for Recapitalising Europe.

Please ‘tune-in’ again soon for a status and progress up date.

theMarketSoul ©2011

The Market Equation

Please note:  This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA.  If you would like to speak to the author about any aspect of this work, or in order to contribute towards developing the framework and ideas further, please click on the Contact Us link.  (We acknowledge and reward valued contributions).

The Market eQuation (MeQ):

Today we are commencing our investigation and outreach to discover what we will call the Market Equation.

Basically the idea is to come up with a mathematical equation and rating or ranking system to assess the state and status of various markets.

Whether this will lead to a theory of Markets that can compete with some of the other theories in existence is open to debate.

The basic premise is this:

There should be a methodology to access the Openness and Fairness of any given market versus other comparable markets.  This specific ratio or result should therefore determine the individual participant’s level of engagement and commitment to that specific market.  The result should also be able to be repeatable over time in order to elicit trends and movements of particular markets relative to each other.

The basic equation can be expressed as MA²R⁴K²E³T³ = OF outcome (Open & Fair).

Therefore:

OF = (A)² x (R)⁴ x (K)² x (E)³ x (T)³

And derives from the Market Equation Table listed below:

The Market Equation Table

  

O	Open
F	Fair
M	Multiple
A	Accessible	Adjoining
R	Random	Rapid	Regular	Repeated	Regulated	Risk
K	Complex	Connected	Competitive
E	Effective	Efficient	Equilibrium
T	Technology	Time	Trade

Key:

Subjective measure

Objective (External)  measure

MA²R⁴K²E³T³ = OF outcome

Therefore: OF = (A)² x (R)⁴ x (K)² x (E)³ x (T)³

The subtler reader might already have seen through this equation.  Because by dropping the M (which will always be 1) the letters that remain result in the word raket if unscrambled which in effect is:

RACKET or not?  With the additional C being the complex bit so ultimately the Market Equation becomes a COMPLEX RACKET.

theMarketSoul ©2011

I blame John Maynard Keynes (JMK)

Ever since the Great Depression and JMK’s ‘The General Theory of Employment, Interest and Money (1936)', have we had more intense government interference and hence taxation in most advanced economies.  Thank you JMK.

But seriously, how much is too much?  There must be value in controlling fiscal policy, monetary policy and (social) employment policy, but is this being done in an integrated fashion and with ‘value maximising’ principles?

We at theMarketSoul Limited believe this not to be the case.

We prefer to take a leaf out of Joseph Schumpeter’s book and view the economic cycle as either short (1 – 2 years), medium (around a decade) and long-term (many decades).

The trouble with any form of economic analysis is that taking any temperature readings during any specific cycle is just that – A temperature reading.  Meaningless without being set in its proper context. We generally have a major problem in identifying where we are in any given long-term cycle.

It is only with hindsight and the historical perspective that we can truly determine where we were and where we thought we were heading.

It is our belief that we are (still) in the midst of a major paradigm shift, triggered by the innovation wave of the ICT revolution over the last 20 years.

We still have not fully grasped the consequences and full extent of this ‘drift’ to a new equilibrium.

As one of the unintended consequences we are currently facing up to a sovereign Debt balloon and are desperately trying to determine when we will encounter ‘Peak Debt’.

One of the popular libertarian ideals is to cut government’s stake as a percentage of total output of GDP.  We endorse this view, but it appears that at the end of the day (because we have forgotten what Laissez faire looks like); we’ll still need someone to keep the lights on, adjust the interest rates and collect our taxes.  All this in the name of job creation…

theMarketSoul ©2011

A cynical swipe at the money (value chain) consumer end of the line

Today’s short opinion piece revolves around the recent rail fare increases announced in the UK.

It strikes us as a very cynical way of rewarding behaviour and policies implemented by previous governments and parliaments to now go and increase the ‘tax’ on rail commuters when the switching policy from road to rail has meant that more rail passenger miles are being racked up versus road miles and supposedly turning off the tax flows into the Treasury from fuel duties, because more rail journeys are being undertaken.

Yet again the pendulum has swung the other way and at the consumer end of the bargain, we are being sent a confusing message us to which behaviours the government wants to encourage us to take. 

No wonder the general malaise of cynicism and anti democratic behaviours we have recently experienced has and will manifest itself again.

Less government, less interference, less confusion.  Let the (a well governed) market help efficiently incentivise people to do the right thing at the right time for the right price.

theMarketSoul  ©2011

For more information about the Economics of Taxation just click the link in this sentence

International Journal of Transport Economics

The Economics of Social breakdown

How do we define the state of our nation at the moment?

For a little while now we have been experiencing an ‘unease’ with the communication revolution and the disparate nature of communication tools at our disposal. On the surface it would appear that what is happening is that rather than bind together a society it is having exactly the opposite effect.

The recent riots in the UK is just a small manifestation of this general unease.

From a purely economic and dispassionate analysis of the situation, we would offer the following opinion:

We don’t have a ‘broken society‘, as is such an often uttered phrase, but rather a complete misunderstanding of the disconnect between our ‘old / slow business models’ and the pace at which technology moves and changes the rules of engagement.

The pace of change in organisational design, planning and execution models lags multiple-fold behind the pace of technological advancement. It almost has an exponential relationship and due to this factor, we have not yet come to grips with applying new technology to ‘old world’ thinking, with its checks and balances and control mechanisms.

The disconnect between the pace of the communication revolution and the nature of diminishing returns has led to a massive gap in appreciating the fact the occasionally we have to pause and reflect on where we are and where we want to be.

Both the continuing economic crisis, pace of change, realisation that the future does not hold the same promise and prosperity as the recent past; are all infliction points that have amplified and spilled over into anger and the violence of the past few days.

So what we have is a ‘broken understanding’ of how different factors of production, such as land, labour, capital, enterprise and innovation has drifted further apart and caused unnecessary and unsustainable concentrations of accumulated power and risk amongst differing population groupings in the UK and elsewhere.

Remember, all five of these factors of production listed above need to work in harmony, in order to add, create and manage value and output that are useful and life sustaining necessities for all citizens.

Let’s address the gap between political and civil society to ensure sustainable progress and development for all.

theMarketSoul © 2011

So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor's finally took the 'big step' on Friday 5 August, after the major markets closed.







So what next?






In our article 'US Treasuries - Are the markets really that bothered?' published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.






Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:






Is this an FX or market call?






What we meanby this question is:






Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?






All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.






Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.






How the US Treasury and administration now react will be crucial.






Who are we going to trust to make this big call?






theMarketSoul © 2011

A sigh of relief?

Some say that in life timing is everything...

And so too it is with economics.  We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.

Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.

In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14^th Amendment.

And this is where the timing conversation picks up its thread again.  The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending.  Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt.  In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries.  If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.

If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.

But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.

theMarketSoul ©2011

The Theory of Money and Credit

The US Treasury Yield Curves #2 – Do you factor inflation into the deal?

In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills.  The Nominal (quoted) Yield Curves and Real Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and  30 July 2006 are listed below.

Yield Curve 1

What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors.  Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields.  In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.

A cynic might make this remark:

“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”

They win both ways!

theMarketSoul ©2011

Source Material:  US Treasury web site: 

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx