Friday, June 1, 2012

Situation good for stocks, not so good for people? What are the tolerance limits?

Over at Mosler Economics, a recurring theme keeps cropping up, about given market conditions being "good for stocks, not so good for people."  Does that imply a steady-state summary of SNAFU?

see here
and "Payrolls: Bleak with 1 Silver Lining" (upcoming at Warren's site)

Short term problem for "investors" is that stocks may do well, right up until some "local spring" occurs, and locals decide to alter the existing peg between stocks & welfare of the people. The core question reverts to "What are we investing in?"

Long term problem for individuals in aggregates is "good for stocks; not so good for people."

What was that comment about aggregates being irrational longer than members can remain solvent?  And it's inverse corollary - aggregates remaining insolvent even longer than a threshold # of members see the light?

So what's a "normal" amount of AFU?  How do we adaptively manage net-AFU ("NAFU")?

Conclusion: We need a more OpenSource, dynamic model for co-tuning investments in personal & aggregate capabilities - in real time.

Functional Finance & it's evolving MMT operations-set comes closest yet, as far as I know. Small tribal systems accomplish this through persistent affinity tuning, which simply doesn't scale up to our current population sizes. Neither do rules-based systems (i.e., legal codes). Financial models alone sure as heck don't! Their narrowly perceived "impact" is invariably completely orthogonal to our aggregate adaptive path.

Are we trying to enforce convertibility between financial & human-welfare metrics, or do we have to transition to a fiat options-for-the-aggregate policy system? Shouldn't policy float with enough agility to allow optimal pursuit of public purpose?

Stocks vs people comparisons obviously involve dynamic situations with 2, independent variables (yes, each each is the sum of a complex polynomial, but let's just keep it simple for now).

Such situations can adjust in infinite ways - theoretically - but eventually only a few, from "our" perspective. Here are 3.

Plutocrats holding stocks can benefit, & seize control of serfs.

Dynamic stability can pause somewhere, as the Pareto ratio briefly stabilizes anywhere between 1 to 99% disparity.

Serfs rejecting not-so-good stock/people pegs can rise up and financially-guillotine some fraction of the plutocrats, ala the 1776 US Revolution, the 1789 French Revolution, or the 1933 New Deal.

What determines which route current aggregates take, and how do we stay within tolerance limits separating gracious vs wasteful aggregate adjustments?

Some immediate, $100 questions arise, about managing how close we get to some of those important & very dynamic tolerance limits.

1) When manipulating available "aggregate-buffers", e.g.:
__buffer unemployment (serf) stock;
__buffer commodity stocks (oil reserves, etc);
__buffer "money" stock (ill defined, lost between buffer commodity & buffer fiat);
__buffer distribution of individual enablement;
__buffer "net welfare of the people";
__etc, etc, etc ...

... which buffers are most important to manage, how well?

(Depends on whether you have a:
personal-investor-only outlook, spanning any/all aggregates, ala MMR,
or a patriotic, aggregate-options approach, ala Warren Mosler,
or a pan-aggregate eco-approach ala ECT.)

2) Taking the operating-aggregate approach, the buffer metrics in play all sum to a buffer national capability stock (defense/security, competitiveness, etc, etc).
This always involves many uncertainties.  (Combine Heisenberg's Uncertainty Principle with Darwin-Pirsig's static/dynamic value spectrum.)
..How many optional ways of failing can an aggregate choose from?
..What determines whether it can detect & recognize the particular form of suicide it's pursuing, and respond?* 

3) In the USA, do we, or do we not have an adequately accurate model of #2, to guide our actions?
Of course there's no absolute metric, but do we have a currently-adequate model distributed across the group-mind of our electorate?

4) No?  Then do we have a theory, method or process for keeping our nation afloat as it surfs oncoming reality waves?
Or are we already hanging 10million, in a futile attempt to ward off an already-inevitable, aggregate wipe-out?

5) No?  Then do we at least have a service to clean up all the pants being wet as that slowly sinks in?
(You're doing a heckuva job Brownie!  You too, mortgage/car/student loan guys!)

6) The DoD has an old rule of thumb for dealing with irritants.  It's called the "3-i's" of contingency management - can we apply it to ourselves?
Unfortunately, that strategy turns out to be overly simplistic, as demonstrated by the drones in our current NeoConniving policy outlook.

i) instigators - go after the source & stop it (but in this case the residual source is the future, and we can't predict it)

ii) intercept -   disrupt whatever's already in flight or in the works;

iii) impact -     mitigate & survive whatever can't be prevented.

So, do we have an evolving strategy to look even further than the droning, 3-i's approach?

7) Can we use an indirect, end run around the limitations of the 3-i's?  One that involves adapting ourselves?  The "3-a's" - for agile adaptations?
If we work on being all we can be, then:

a) we need fear fewer, if any, automatic reactions to our perturbations;  less paranoia;

aa) we will - earlier on - detect, recognize & accommodate enough things occurring to go on our way, unfazed;

aaa) by earlier/better/cheaper self preparations, we accommodate whatever's ongoing, and go on our way unhindered.

So, back to the question at hand. How do we track how close our population gets to its limits? The ECB, Euro & national parliaments don’t seem very good at tracking that metric … at all.

Does ANYONE have any suggested answers?

Here's a starting goal - just an outlook for alignment. We don't NEED "Super-Economist." In fact, we need to avoid the very myth of pursuing individual prizes, since it's so self-destructive for our aggregate. Instead, we need to encourage success through the quality & pace of distributed decision-making. To achieve that, we need to allow distributed citizens the wherewithal to accelerate the quality & pace of distributed decisions, so they can sum to a more wholesome whole.

To do that, we need our distributed policy thoughts to stay the hell out of everyone's distributed tactics - unless absolutely dictated by proven, aggregate need.

More suggestions absolutely needed.

* [Note: Group intelligence cannot be represented in the output of any pundit, no matter the magnitude of their ego. The Heisenberg Unintelligence Principle proves that the spiral of pursuing a "prize" negates the relevance of what's spewed circa the event. In a curious twist, the super-weak "ego" force causes "matters" to create "not-matters" as an automatic de-stabilizer. :) ]


Tom Hickey said...

Roger, historically the problem began to develop when Wall Street began to focus on quarterly reports and top management began to be compensated in financial instruments like warrens to avoid income tax. Then the whole focus of management became to exceed analysts' projections quarterly to enrich top management instead of building shareholder value by creating a solid company that is future oriented.

Roger Erickson said...


So you're saying that stock prices are NEVER worthwhile tuning on a short-term scale?

That means we're chasing the very signals that lead us in directions instantaneously tangential to a constantly winding path.

Over committing to quarterly goals in a long term race may look like good tactics, but is disastrous strategy. Isn't that exactly how the German's lost WWII?

Tom Hickey said...

Right, Roger. It is a crazy way to do things. A lot of the so-called profits in earnings reports come from the way the accounting is done, for instance. There's a lot of smoke and mirrors in the game. This is what Warren Buffett has been saying, for instance.

Then, there the mergers and acquisitions, and equity capital game that basically extracts value and leaves a shell loaded with debt.