Inflation For 2014?

One has been concerned about inflation with the massive expansion of the FEDs Balance Sheet. We have been following that now for some five years plus. But alas the money is printed but is still not going anywhere. Let us examine some of the details.

First M2 and its annualized change as above. M2 is increasing at a fairly good clip. It has gone from $ 6.7T to $11 T in the past seven years. That frankly is a massive increase. It should spur inflation, but it has not.

Here is most likely why. No GDP growth. The money is printed, it is out there but people are not getting it to spend.

Now look at the Monetary Base. Some five years ago we wrote a piece on the Monetary Base suggesting what would happen. And it has happened.

Thus when we look at the calculated inflation rate it is near zero. Things are going no where. The money is staying with the Banks, they are using it to make more money and it is hidden from the economy.

The above shows the details. The velocity is low, money is not changing hands, except in the banks themselves, which makes them money but leaves the rest of society broke. This is a FED artifact. It also seems to be a hidden fact.

Is we look at M2 and the Monetary Base we see what is happening. Money printed by the FED, flows into the Banks and stays there. The question is; how do we break this log jam, and what is the cost in inflation when it does break.

Understanding Bayes, and Economics

In a recent NY Times piece the Fellow from the South had a discussion on Bayes analysis. Now I wrote a book on that in the late 1960s so let me refresh your memory. Bayes said that if you took into account the data up to the present that reflected information on the data you were trying to estimate then you could get better estimates than if you just used what was available a priori. Let me make this a bit simpler.

Assume you have some system with variable x which is a dynamic system you know follows some law of nature but may be perturbed by some random process. Namely let:

dx(t)/dt = a x(t) + w(t)

and that you have some measurement of y(t) which relates to x(t) but may also have noise:

y(t) = b x(t) + n(t)

Here we assume that w(t) and n(t) are random processes and further we assume they are Wiener processes. Most likely they are not in reality, but who cares, this is an academic problem. Now we want the best possible estimator in a mean square sense of x(t) give that we have y(t) over some interval (s,t).

The answer is a Bayes least mean square estimator gotten by determining the conditional probability density, p(x,t|y; (s,t)). That approach was initially proposed by Kolmogorov and Wiener and then by Kalman. The nonlinear version was done by Stratonovich and, you guessed it, me.

The essence of a Bayesian world is that we are desiring to estimate some variable, say x, and we have a set of observations, say y over some time period, and, this is key, we know both the relationship between y the observation and x the system plus we know how the "noise" disturbs things.

The conditional probability described above is the Bayesian methodology. Now there is another way to consider this problem and also to add complexity, namely it is to allow for the Rowe Conjecture. Now Nick Rowe proposed this conjecture about four years ago as a simple premise. Namely, if one looks at some "Economics Law", in his case the Efficient Market Theory, one knows that this may or may not hold in reality. Thus there is a random process related to the law itself being extant. Also inherent to the EMT or Hypothesis, there is randomness to it being true or not. In addition, for Rowe both nature, namely the Economics law, and the people themselves may be random. This means people may "believe" that the EMT applies or does not apply.  The people may be in one state or another and that means the people may act differently based upon their belief no matter which law is in action. Thus the combined system of law and people as a system description is itself totally random. It would be like us saying above that the system, as the EFT, is:

dx(t)/dt = a x(t) + w(t)

or

dx(t)/dt = d x(t) + w(t) 

where we may or may not know a and d and further we may have (for the people):

y(t) = b x(t) + n(t)

or

y(t) = e x(t) + n(t)

It actually may be even more complex. But we will not consider that here.

Now we all know gravity does not work that way, nor does thermodynamics, nor even bridge design, but somehow it works in Economics, just look at the Nobel Prizes. Second, as Rowe conjectured, people act either believing this law holds or not believing it holds, and some fraction of the population may hold one view and some another. There is a whole lot of literature on this type of a world as well and even another Nobel Prize in this area.

Thus, using the Rowe Conjecture, we have cycles developed where the law may or may not hold and people may or may not believe in it. This then is one way to explain the Business Cycle, in part. Now there is no Nobel Prize in this statement. But its does provide insight into human behavior and the lack or consistency in economic "theory".

Along comes the Fellow from the South and presents his theory and this is what he says:

It seems to me that xxx position – he only said it was a danger, not that it would happen at any particular time, so it signifies nothing if it doesn’t happen even after four years have passed – is just untenable in its strong form. If saying that something is a danger carries no implications for the likelihood that it will actually occur, what is the point of saying it? You might as well stand up there and say “Nice day for weather” or sing “Mary had a little lamb.”

No, clearly talking about the danger of inflation was some kind of statement about probabilities – in particular, a statement that the probability of inflation is, according to the speaker’s model of the world, higher than it is in other peoples’ models of the world. And that means that actual events do or at least should matter – they may not prove that one model is wrong and another is right, but they should certainly affect your assessment of which model is more likely to be right.

In short, it’s a Bayesian thing.

Well not really. It is a Rowe Conjecture "thing" I believe.  A Bayes "thing" is purely probabilistic about a well structured world. A Rowe Conjecture "thing" is a probabilistic structure about a probabilistic world. You see, the theory is just that a theory, and the "theory" has the tendency to change. Furthermore people may or may not believe the theory, especially after the past five years of ranting amongst Economists.

Choosing the High Cost Option

In a study of the Oregon lottery Medicaid program the authors noted in Science that the Medicaid recipients as compared to others used the ER at a dramatically higher rate. They conclude:

These limitations to generalizability notwithstanding, our study is able to make use of a randomized design that is rarely available in the evaluation of social insurance programs to estimate the causal effects of Medicaid on emergency department care. We find that expanding Medicaid coverage increases emergency department use across a broad range of visit types, including visits that may be most readily treatable in other outpatient settings. These findings speak to one cost of expanding Medicaid, as well as its net effect on the efficiency of care delivered, and may thus be a useful input for informed decision-making balancing the costs and benefits of expanding Medicaid.

Namely those with Medicaid did not, as expected, find physicians to deal with their ailments, but just fell back into the old pattern of the ER but now at a substantially higher rate. This does not bode well to the ACA cost controls. In fact nothing seems to be helping! Told you all so!

Burke and Paine

The book by Levin, The Great Debate, is an excellent contribution to the studies of Burke versus Paine. Although their debates are over two centuries ago, they ring true today as well. The questions explored by Levin center around the “conservatism” of Burke and the “progressivism” of Paine. Although this alignment is attempted, that is much of the text deals with trying to understand both authors in a context interpretable today, in many ways there is a bit of current day “conservatism” and “progressivism” in both Burke and Paine. There is not a one to one alignment.

Levin presents his arguments in an exceptionally clear and concise manner. The book is quite readable and the structure of his argument is built in sections presented in each chapter. One does not have to dig to any depth to see where he wants to take the reader. Levin clearly understands Burke and also has a good grasp of Paine.

Burke was the conservative, born in Ireland and raised in the Church of England and a Member of Parliament. His career was highlighted by his writings as compared to any Legislative prowess. Paine was class wise a step or two below Burke, leaving England and starting anew in what was to become the United States. His skill as a pamphleteer was extraordinary and in so doing he absorbed and even created the sense of his times. Paine personally paid for his major work, Common Sense, which in many ways ignited the Revolution.

Levin begins by providing a brief overview of the lives of the two men. It is well done but it in some ways fails to dig deeper and understand what may have made a Paine and a Burke. Paine was in a sense an entrepreneur, he abandoned England and his “place in that society” to travel to American where he could create the person he became. Paine was the risk taker, seeing the need for change, albeit with risk, and taking the chance. Burke in total contrast knew his places and sought ways to maximize the best as possible his position in that place. Burke not only accepted the system as is but proselytized that system as the sine qua non of how things should be. Paine rejected that system and saw in the individual the path to change.

The reader should have some knowledge of the times to best understand some of the content. Let me provide a first example. On p 31 in discussing Burke there is the statement “Praising the gradualism of the English constitution …” First, there is no document in existence which one can call the English Constitution. Second, when one looks for the English constitution one starts with the Magna Carta and then proceeds forward with an amalgam of Laws, Parliamentary proceedings and the rulings from Common Law courts, namely precedents. In addition the English constitution assumes that English society is built around three classes; the Crown, the Aristocracy, and the Commons. Namely, one always knew one’s place, and one must act accordingly. It was this theme which flows throughout the book and also was essential to Burke’s thought. In contrast in America one could be whatever one wanted, and class was essentially non-existent, thanks in many ways in which the English ruled.

There is a second theme that flows throughout the book, individualism. Levin comment on p 29 as follows: “Burke laid out an argument against radical individualism,” A major issue which needs clarification is; what is the definition of individualism? This terms in in Burke and it returns a few decades later in de Tocqueville as a major characteristic of America in the early 19^th century. Individualism was in many ways a rejection of the Burkean conservatism, namely of a society with an immutable class system, a society of strict structure. On p 36 the author states the core set of points upon which the battle between Burke and Paine rested, namely;

“…what makes a government legitimate, what the individual’s place is in the larger society, and how each government should think about those who came before and those who will come after.”

This question then flows throughout the book. Levin does a splendid job and going back and forth from Burke to Paine and exploring the details of the answers thereto.

Chapter 2 presents the two varying views of Nature that each had. These world views become the platforms upon which they build their ideas of government and society. To Burke there is formality and structure. Burke was a traditionalist, a royalist. On p 61 Levin presents the famous quote from Burke’s Reflections where he states:

“We fear God; we look up with awe to kings; with affection to parliaments; with duty to magistrates; with reverence to priests; and with respect to nobility.”

This as Levin note is the totality of Burke’s world view. The irony is that Burke, as an Irishman by birth, with a Catholic mother, see reverence to priests of the English Church but death to the priests of the Catholic or Irish Church. Again one must read de Tocqueville’s comparative journey through Ireland in the mid-19^th Century to best understand this comparison. The question is; is this conservatism or a dogmatic slavish following akin to Stalinism?

In contrast Levin ascribes a “radical liberal thinker” to Paine (p 57) and these types of thinkers, says Levin, “leave the human sentiments and role of the imagination out of the understanding of human nature”. This was an Enlightenment battle between reason and custom.

In Chapter 3 the author begins a discussion of Justice and Order. He states on p 69, “For Paine, the appeal to nature is primarily an appeal to justice.” One must ask; what definition of justice do we use here? On p 71 Levin presents an excellent discussion of the integration in Burke’s conservatism of utilitarian ideas, a “procedural conservative” mind.

Chapter 4 is a key chapter wherein the issue of individual choice and obligations (duties) are discussed. This chapter alone is worth reading. As Levin states on p 92; “The idea of rights sits at the core of Thomas Paine’s political philosophy. Rights are the organizing principle of his thought and the prime concern of all his writings about government.” But what is most important is that rights refer to the individual, each individual, qua individual, has the rights. The rights are not group rights; they are rights to the person. Burke vied society as an amalgam, he rejected the individual qua individual. Burke believed in classes, groups, because English society was so structured. Paine understood most clearly as a result of the discussion of the Bill of Rights that they accrued to the person, each and every person. In contrast Levin speaks of Burke on p 101 where he states: “As Burke sees it, each man is in society not by choice but by birth. And the facts of his birth – the family, the station, and the nation he is born into – exert inescapable demands on him, while also granting him some privileges and protection …” One need go no further to understand the difference. To Paine the individual is unbounded in potential, to Burke the individual is molded by eons of history and genetics. England had its Aristocracy, a core element in its English constitution; America had the individual, and the Bill of Rights.

Chapter 5 the author discusses Reason and Prescription. Reason is the core to the Enlightenment, namely by reason we can come to truth. Prescription is term defined by Levin on p 1`40 as; “The term prescription originated in Roman property law, where it referred to ownership by virtue of long-term use, rather than by formal deed.” Simply put, the battle between Reason and Prescription is the battle between what we think NOW is best as compared to what tradition had determined as best. It arguably is what many think is the contrast between liberal and conservative in current day America. I would argue that perhaps that is not the case and that the battle is truly between the individual versus the group. But here in two adjoining chapters Levin lays out the principles as advocated by Burke and Paine, and as battled today.

There is an undercurrent discussion in Chapter 5 as well, the discussion on equality. On p 151 there is a discussion of equality and the individual. For Paine one should be allowed to open the discussion up on the laws at least in every generation, for Burke he sees a slow representative government. The issue is the individual and equality. This theme comes again when Paine enters the fray of the French Revolution. The Liberty, Equality, Fraternity motto was focused on Liberty in the Americas and Equality in France. One can see Paine struggling with this issue. Whereas Liberty is consonant with Individualism, Equality may be taken to an extreme and destroy the individual. The resolution is left unsaid.

On p 153 the author makes a most important observation; “”He (Paine) argues that every individual is capable of employing his own reason to discern the truth or falsehood of a political question … Paine believes that every individual has the capacity to begin from scratch, rather than beginning where others left off.”

In the Conclusion the author makes the following statement on p 237:

“The fundamental utopian goal at the core of Paine’s thinking – the goal of liberating the individual from the constraints of the obligations imposed upon him by his time, his place, and his relations to others – remains essential to the left in America.”

I would argue that Paine placed power in the individual and not the group and that the left empowers the group often against the individual. Progressive ideas are ideas of group culture and are often opposed to individual culture. Paine I would argue is the champion of the individual and it is Burke who empowers the group. But Levin does a superb job in bringing these issues to the fore. His book is an essential read for anyone who wants to understand the differences in our present day culture and more importantly the bases from which they sprung. What makes a conservative or a progressive? This book helps one think through that process better than any other.

Stuck in a Ditch

Science has a piece on the changes occurring to the Clean Water Act controls. As Science states:

The confl ict is rooted in the Clean Water Act of 1972, which requires anyone wanting to dredge or fi ll a stream or wetland to get a permit from the federal government. (Many agricultural activities are exempt.) For decades, U.S. offi cials and the courts held that the law applied not just to the “navigable waters” mentioned in the act, but also to all the smaller streams, wetlands, and ponds connected to them in a variety of ways. Numerous groups challenged that interpretation, however, and in the 2000s the U.S. Supreme Court dealt the government several setbacks. In a 2006 split decision, for instance, it ruled that EPA could not regulate any waters unless it demonstrated that they had a “signifi cant nexus” with downstream navigable waters, such as affecting their physical, chemical, or biological integrity. Since then, confusion has reigned over the legal status of ephemeral streams and isolated wetlands. In 2010, EPA began to try to clarify matters by writing the new rule. It calls for the Clean Water Act to cover all tributaries, headwater streams, and “adjacent” wetlands.

Namely we now see ditches becoming part of navigable waters. That is "dry" ditches. It is not even clear how deep a ditch has to be. The actions of the EPA will make it illegal for anyone anywhere altering in anyway a run-off area without prior EPA authorization. This clearly affects hills, slopes, gulleys, and almost any and every piece of land everywhere.

Admittedly there are agricultural carve outs but the new regulation, yes regulations written without a new law are now laws, the new regulation delimits plowing of a field, setting up a home garden, and yes folks watering your lawn.

Happy New Year!

We are starting a new year here and it is most interesting to see what has transpired since 2008 when we began this effort. Many of the Blogs that I had been following then have faded away. I guess it takes a bit of work to continue one over such a period, or perhaps you just run out of rants. Fortunately we have had the fine fortune to continually interact with folks who throw up new and enticing thoughts, thoughts to be rolled around and refined.

On the other hand I have seen the left wing blogs seem to continue their screaming-out their protests of injustice, inequality, and only God knows what. In addition they just continue to be nasty, rather rank in their dealing with people and topics. But it is a new year and it brings many challenges. Let me outline a few that should be of interest:

1. Middle East is Exploding: This is in the worst mess since I can remember. It is not just Israel and the Palestinians this time. It is the rest of the mess. The US does not seem to understand what is happening, revolutions are afoot and we seem to have not a clue.

2. Energy: This is a strange once since we no longer depend on foreign oil. Wind mills still turn but they have not been brought to a point of being a true contributor. Unlike the 70s we now can sustain an energy crisis elsewhere unless of course Washington makes it worse. Then again given what brainpower we have there it highly likely that we will see it messed up no matter what.

3. Health Care is a Debacle: One expects as this rolls out that there are so many cooks in the kitchen, and for those employed by the Government rather dullard types, that we can expect people doing the most foolish things. Just think how easy this would have been if we did it like auto insurance. Individual, no Government intervention, and portable. Just make it so it is required by all, no preexisting conditions bias, rates by age, penalties based on life style choices such as smoking and obesity. It plays into what we do in auto insurance. But no, we had to have Government control. Just watch.

4. Employment and Productivity: Productivity still increases driving out labor. The labor content of produced goods is dropping dramatically and will accelerate. What that means is that the strategic advantage of cheap labor will disappear and market location will be selected more on tax, regulation, and political stability. Perhaps this may be a God send for Ireland.

5. Nuclear Threat: I lived through the Soviet-US nuclear threats, they were real, but the parties were fundamentally rational. Mutual Assured Destruction was clear, do not go there. The current crop of crazies are not the Russians. The Russians have a culture, a love of their children, and the desire to survive an thrive. Not the same can be said for some of the current crop. This is a clear and present danger.

6. Data and Personal Security: The biggest political debate I believe will be over the heavy handed actions by the US Security apparatus. Not only do they intercept outside of the country but now they appear to be invading our very homes. One could not envision a more brutal attack on our fundamental Constitutional Rights.  Many in Congress are turning a blind eye to the effort. I have been aware of the actions of some of these folks for decades, but in the old days it was done outside the US. Now, we have seen the reverse. I continue to say that terrorists are not that dumb, they can find ways to keep below the radar. That leaves the rest of us vulnerable. This may very well become the debate of the decade.

Let us see how 2014 plays out, Happy New Year.