Freitag, 29. Januar 2016

Rethinking what an Investment really is...

If you follow the definitions of the so-called economic sciences , then you end up in a maze of smoke and mirrors and the matter never gains clarity. This result is almost certainly by design! To achieve clarity, one must apply critical thinking skills to the observable things, leading towards an explanation / theory. Successful investing is a successful process of aquisition of work results, which is an exploitation of the counter-party. The investor wants a return greater than what he "invested". To achieve this goal the investor (an entrepreneur or the State for example) goes to the bank and takes out a loan. The Bank creates money = a refined to Umlaufaehigkeit claim = a generally accepted "money" claim = an "ex-nihilo" (out of nothing) claim against the public and places such "funds" at the disposal of the "investor". At the same time, the bank creates a specific agreement with the borrower for repayment of the "money" / the debt = the credit contract. With the money made available to him the investor buys labor from workers in return for wages. The investor is free to determine the use of the labor (eg the construction of a road ). When the road is finished, the investor owns the rights to the road. In order to fulfill his debt contract with the bank, the investor demands a fee for the use of the road from the workers and those who have fed the workers in exchange for money ( the farmers ) during the construction. The farmers accepted the money because they had to acquire some to pay their taxes to the state. They also saw advantages to having access to a road. So the money is recollected ("reflux"), flowing back to the bank in the form of debt repayments. This results in the bank-credit "money" being destroyed. If things were to remain that way, the economy would collapse, as it would be starved of "money" while the demand for money necessary for paying taxes and fees to use the work results continues. To ensure that this does not happen, the bank must find other "investors" with credit-worthy projects toprovide the workers work (and wages) and acquire the work results as described above, to satisfy their central motif "More, more... MOAR" and their credit contracts with the bank. But the scam works also without funding productive work projects -- undertakings that are totally unproductive. For example in an economy where all necessary roads are already built, if the money created out of nothing is more and more allocated towards speculation in the financial "markets" = unproductive redistributions in zero-sum games which contribute nothing to the "real" economy. The system is expansive by its nature, but at the same time it creates highly concentrated ownership of the things (especially the means of production) in the hands of those who were deemed by the Bank as credit-worthy and successfully "invested" the loan in the way described above. If the money creation / lending process stops and thus the investment = aquisition / exploitation process for whatever reason (eg, binding of money creation to gold, investors run out of ideas, a crisis that reveals the operation and its consequences), the economy grinds to a standstill resulting in an inevitable deflationary collapse.



Sapere Aude!

Georg Trappe

This article was first published in German 29. July 2015 here
Many thanks to Wesley Freeburg for editing and improving readability in Engish.
 

Mittwoch, 27. Januar 2016

Emergenz oder die Quelle intrinsischen Werts von Fiat Geld

Die Sache mit dem Wert des Geldes bzw. einer Hinterlegung von Wert in Form von Sicherheiten, Gold oder was immer es ist, ist etwas was der Akzeptanz oder besser der abgoettischen Liebe zum Geld auf die Beine helfen soll (Bootstrap Verfahren). Der intrinsische Wert von Fiat Geld ist auf den ersten Blick Null. Darueber muss man zunaechst mit viel TamTam und Buhei hinwegtaeuschen, um so die Sache in Gang zu bringen. Ich nenne das die Veredlung zur Umlauffaehigkeit. Wenn Geld als Zahlungsmittel akzpetiert wird, dann ist Geld eine Forderung gegen die Allgemeinheit. Ich kann damit alles kaufen was angeboten wird und Geld als Zahlungsmittel akzeptiert. Der Verkaeufer des Realwerts macht dabei einen Aktivtausch der Art offene Rechnung=Forderung aus Realkredit=spezifische Forderung gegen den Kaeufer gegen eine zur Umlauffaehigkeit veredelte Forderung gegen die Allgemeinheit. Ein weiteres wichtiges Element zum Aufbau und Erhalt der Akzeptanz=Veredlung zur Umlauffaehigkeit ist die Erhebung von Steuern durch den Staat in Geldform. Denn damit ist ersteinmal jeder gezwungen, der in legaler Weise am wirtschaftlichen Leben teilnehmen will, entweder bei den Masters of the Universe Geld, das diese aus dem Nichts schoepfen zu leihen, oder aber fuer Geld, das ein anderer geliehen hat zu arbeiten bzw. bestehende Realwerte zu verkaufen. Das ist dann alternativlos. Wenn so allgemeine Akzeptanz hergestellt ist, ist Geld, wie bereits gesagt, eine Forderung gegen die Allgemeinheit und damit ein perfektes Fuehrungs – und Lenkungsinstrument. Damit lassen sich dann (Arbeiter)Heere aufstellen und bezahlen. Und es ist in der Hand derer die das Geld bereitstellen zu bestimmen, in was die Arbeit dieser Heere fliesst. Und damit bekommt Geld dann auch einen intrinsischen Wert, der darin besteht, dass Menschen so zu einer Kooperation bewegt und koordiniert, Aufgaben bewaeltigen, die Einzelne nie bewaeltigen koennten (btw, an dieser Stelle wird das System non ergodic). Diese organisatorische Kraft = Macht mittels Geld viele Menschen zu koordinierter Arbeit bewegen zu koennen, liefert einen intrinsichen/emergenten Wert der aus eben dieser Funktion des Geldes als Fuehrungs- und Lenkungsinstrument entsteht. Keiner kann sich in einer hoch arbeitsteilgen Welt mehr vorstellen seinen Lebensunterhalt alleine mit seiner Familie auf einem Stueck Land zu erarbeiten. Alle sehen die Vorteile so organisierter und durch Geldfluesse gesteuerter/koordinierter Arbeit und unterwerfen sich so der Macht des Geldes = der Macht derer, die bei der Schoepfung des Geldes bestimmen, wer, wann, wozu, wieviel und zu welchen Konditionen diese aus dem Nichts geschoepfte Forderung gegen die Allgemeinheit erhaelt, wohl wissend, das da von den Koordinatoren="Investoren" und den Schoepfern ordentlich was in Form von Profit und Zinsen abgezweigt wird.
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Das Problem dabei ist aber das beim staendigen Wiederholen dieses "Erfolgsrezepts" des “Investierens” = Abschoepfen emergenter Mehrwerte Konzentrationsprozesse ablaufen. Das funktioniert nicht immer gleich gut und vor allen Dingen ueber die Population der Unternehmungen nicht homogen. Die Renditen streuen. Und das alleine reicht aus, um ueber einen laengeren Zeitraum die Probleme zu verursachen, die dieser Wirtschaftsweise letztendlich die Funktionsbedingungen wieder entziehen.

Sapere Aude!

Georg Trappe

Montag, 25. Januar 2016

Understanding the dissipative structure of out of equilibrium economies (Part 1, Rev1)

We have dealt with the fundamental conceptual problems that arise from the macroscopic and microscopic aspects of the second law of thermodynamics. It is shown that non-equilibrium may become a source of order and that irreversible processes may lead to a new type of dynamic states of matter called „dissipative structures“.
Ilya Prigogine (1)

The term dissipative structure describes the phenomenon of self-organizing, dynamic,
ordered structures in nonlinear far from thermodynamic equilibrium. Dissipative
structures are formed only in open nonequilibrium systems, which exchange energy,
matter, or both with their environment. Whith the establishment of ordered structures,
the local entropy decreases; This minimization of entropy of the system must be
balanced by a corresponding exchange with the environment.
The established shape of the ordered structures is critically dependent on the system
parameters, and the transition from disordered to ordered state takes place in a
spontaneous way. Dissipative structures show a certain stability (non-equilibrium
stability) against interference from outside, but disintegrate as soon as the exchange
the environment is interrupted or in case of major system parameter disturbances.

-
Examples of dissipative structures are the formation of honeycomb cell structures in
a heated liquid from the bottom (Bénard effect) or at phase boundaries in fluid
dynamics, flow equilibria in biochemistry, hurricanes, chemical clocks and candle
flames. Dissipative structures have much in common with biological organisms, which is
why living things are also often counted among these.
The Earth's surface, including the atmosphere constitutes an out of equilibrium
energieumsetzendes (dissipative) system that absorbs energy radiated by the sun and
emits heat into space. Within this system, a variety of dissipative structures,
such as clouds, rivers, hurricanes or economies can be found.
Even an economy constitutes a dissipative system, in which the increase in the degree
of complexity increases the throughput of energy and production of entropy. The
so-called technical progress within the meaning of the Solow residual can thus be
explained by a complexity increasing for increasing the efficiency of converting
primary energy into useful work for the economic production process. (10)
Dissipative structures here are capital goods (machinery) and organization (companies).


(Translated by the author from the corresponding Articel on the German Wikipedia as of Jan. 25th, 2016 (11).)

Now when we take a closer look at an economy and describe it as a dissipative structure the picture that arises looks like this:


So we have a source of energy (human work leveraged by technology and enhanced by fuels) which feeds two flows (black). One flow into the build up and maintainance of the infrastructure like enterprises, machinery and capital equipment of all sorts and a second one into consumption. In the opposit direction we have corresponding money flow. The ultimate source of money is the banking system and the money is used to pay for good and services which are consumed (dissipated) and for so called investments in enterprises, capital equipment and realated services which are needed to produce the goods consumed in an efficent way.
So money is the steering tool in this arrangement and the money flows determine how much labour and energy flows into the production infrastructure and how much into the production of goods and services for consumption. Already on this very abstract level, which does not show and analyse the interweaved relationships between infrastraucture utilization and consumption etc., it becomes obvious, that a reduction or stop of the money supply must have severe consequences, because the correspondig labour and energy flow will be reduced or stopped as well and the thing can collapse. And this is what almost happened in 2007/2008 when an entrenched mainstream economist like Ben Bernanke who has no idea and is ignorant towards such views, stopped the expansion of the money supply of the largest economy in the world, when he was at the helm of the Fed. And the world is not only still suffering the repercusions of this stupidity but is in the danger that Yellen is trying to do it again. How rediciolous that is, will be shown in an more detailed analysis in part 2. Stay tuned.


Sapere Aude !

Georg Trappe

Samstag, 23. Januar 2016

The Evidence of Disequilibrium

In my recent posts (1,2,3) I advocated a view contrary to the deceptive and misleading view of mainstream economics, which is based on a already falsified loanable funds theory (4) and on obvious false general equilibrium theories. A very disturbing fact is, that there is a lot of data available, but to a great extend ignored, showing clear evidence of and documenting escalating disequilibrium. Most obvious for common people is the out of balance trade of almost all countries in the world (5). Almost every country has a trade surplus or a trade deficit. In most cases current accounts follow the trade inbalances. It is no problem to have out of balance trade of one or the other way, as long as the balance accumulated over time stays close to zero. But as soon as the country with the largest current account deficit, the USA, shows a permanant deficit, this is becoming a very serious problem for the world over time. When you look at it on a yearly basis the last time the current account was in the positive region for the US in 1981 with one exception in the early 90s.

(billions US$ per quarter)

Since then the US accumulated a current account deficit with the world of more then unbelievable 10 trillion US$.

(billions US$)

Meaning that the US imported for more then 10 trillion US $ more goods and services as it was able or willing to deliver to the world in the past 35years. On the other side of that equation are 88 countries who have a current account surplus with the US. And they piled up a 10 trillion US$ stack of paper (mainly US$, US treasuries and other triple A rated US papers) in return for the goods and services delivered to the US. At the same time the US industries degenerated in a significant way. Only 7% of the US work force is working in industries that produce something real.
All others are occupied with services of all kinds. In parallel the part of income derived from labour sunk while so called capital income grew.



But as everyone should know, money and capital never works. Only humans do the work. And it appears that this work is done in a few centers of extrem industrial hyperproductivity. China, Japan and Germany to name just the largest examples. An other astonishing sign of disequilibrium and out of balance behaviour is the fact that the US is using 2x the primary energy per capita compared to highly advanced and productive economies like Japan and Germany for example. And the US consumes on a per capita basis 4x of the primary energy produced in the world compared to the average of all countries.



Source
And that is an other huge problem, which can't be solved by money and interest policies. It is nuts to believe that an interest hike here and some policy changes there will adjust things in a way that not only stops the escalation of the problem but reverses things so that the countries which delivered in sum a tremendous amount of real goods and services for paper to the US in the past 35 years so that they will get something real in return from the US for that money and treasuries accumulated so far.
But not only between countries you see these inbalances. When you look into the economies and societies, be it the US, UK, Japan, China or Germany, you see the same thing. On the level of companies and on the level of individuals. There are a few extremly cash rich companies like Apple, who don't know what to do with the cash and many companies that are cash starved and have to go into debt to keep going. Also the fat tail distribution of company sizes is a clear sign of disequilibrium. And the distribution of whealth on the level of individuals is showing the same pattern of fat tail distributions. So it can be said that this is a scale invariant phenomenon, which again is typical for out of equilibrium systems. An other observation is that the distributions are not stationary but have a tendency to grow towards higher and higher inequality. There is a theory that explains that. But no one wants to know this. Mainstream economics appears to be blind and deaf for all this evidence. Even in the light of the most severe crisis after the great depression in the last century. More then 8 years of endless and fruitless discussions running circular arguments since then are more then enough hybris and ignorance. And it is not only me who is sick of it. If mainstream economists want to continue going hand in hand with the taliban of finance industry and banking fascists in ignorance of the evidence and pushing politics into the wrong direction based on falsified loanable funds theories and obvious false general equilibrium theories, they are free to choose so.
But, and this is a serious but, they should not wonder when they end where all ideologicaly blinded (fascists) end.

Sapere Aude!

Georg Trappe

By the way, the UK is an other economy dominated by its out of proportion finance industry and shows the same signs of degeneration as the US:

(billions GBP per quarter)

(billions GBP)

And Germany is one of the 88 economies  holding and building up the counter position
Accumulated current account surplus (billions Euro) of Germany with US and UK alone.

(billions Euro)

Chinas accumulated current account surplus with the world (mainly US)

(billions US$)

Thanks to Steffen Bogs who runs the highly recommended fact based blog "Querschuesse" for providing the charts based on public available data.

Donnerstag, 21. Januar 2016

The Root Cause or Disequilibrium Economics for Dummies

In my recent posts I tried to explain why the accumulated debt has to grow endless even in an stagnating zero growth economy to make demand match output and I tried to explain why in parallel  the wealth incl. money is progressivly concentrated by a stochastic multiplicative process.  It is this parallel development of ever increasing money=debt supply AND of ever increasing inequality of wealth incl. money that drives the thing to a point where the money can't find its way back to debtors who want/need to pay the money back.



The thing becomes unstable first and brakes down when NPLs go through the roof because banks stop creating new additional money by granting more loans.


(Italy NPLs billion Euro)

(Italy; credit given by banking system to private sector (households and enterprises) in % yoy

This makes it even harder for debtors to find ways to get the money in their hands they need to fulfill their credit contracts. But even with more money injected at the bottom of the wealth pyramid (QE4People), the root cause, an ever increasing inequality of the distribution of money AND real capital driven by a stochastic multiplicative process doesn't go away.
It's that simple!

No one saw that black swan coming;-) while occupied with endless discussions and circle arguments of an absurd nonscience called economics.

Sapere Aude!

Georg Trappe


"World faces wave of epic debt defaults, fears central bank veteran
Exclusive: Situation worse than it was in 2007, says chairman of the OECD's review committee" = Rats get out of there holes, because deception doesn't work any more.
Now, when it is almost to late, they are selling the truth to wash their hands.

The evidence can be found here:

(4) http://georgtsapereaude.blogspot.com/2016/01/the-evidence-of-disequilibrium.html

Some more theoretical back ground here:

(5)  http://georgtsapereaude.blogspot.de/2016/01/understanding-dissipative-structure-of.html
(6)  http://georgtsapereaude.blogspot.de/2016/01/rethinking-what-investment-really-is.html

Thanks to Steffen Bogs for providing the charts based on public available data in his highly recommended fact based blog "Querschuesse".

Mittwoch, 20. Januar 2016

Disequilibrium Economics 101 (Part 2, Rev1)

This is to sum up and conclude what is floating around in my head and in this blog for quite some time. Prof. Steve Keen is one of the rare economists who is building a better understanding of what is going on in our economies by applying modern system dynamics methods and tools. In his models he acknowledges that banks with money creation capacity are an important element if not the core of a modern monetary economy, which needs to be carefully considered and can't be neglected when we want to understand the workings of such an economy. Prof. Richard Werner, a Professor of International Banking at the University Southampton in England, supports Keens view on the role of banking by his eye opening work about the way banks operate. Both refuse the loanable funds theory and Werner published several papers (1,2,3) showing strong evidence that it is justified to do so just recently. The loanable funds theory, which is an important part of neoclassical thinking, assumes banks to be pure intermediaries, who collect savings from people and companies with a money surplus on one side of their business and give loans on the other side to people and companies who demand a credit. This loanable funds theory ignores the fact, proven by Werner, that banks create money out of nothing, when they buy an asset like the credit contract with/of a debtor. So banks are not channeling flows from A to B but are sources and sinks for money, which is an very important difference when you want to understand the systems dynamics as Keen has always telling the world. In electronics the loanable funds theory assumes banks to be a simple wire but in reality they are batteries. You can guess how different the results are, when you want to start your car with a simple wire instead a little more complicated battery;-). So the loanable funds theory is a serious misleading theory, that must produce disastrous false results, when you analyse the workings of an economy based on it. An monetary economy without money sources in it will not start working like a modern car will not start without a battery.
Beside the disturbing fact that mainstream economists don't know or refuse to know how banks really work they are obsessed with an other misleading theory / assumption/ phantasm, which is the idea that an economy is a system that tends to equilibrium by itself. The opposite appears to be true and like in the case of loanable funds theory, mainstream economists insist to ignore all evidence of the fact, that real economies behave like and show clear symptoms of systems driven out of equilibrium by a flow (of energy). In a system that tends toward equilibrium, gradients are flattened out by distributing the energy, the heat, the what ever it is which is more or less concentrated somewhere. We call this diffusion and that can be visualized with an simple example.



But an real economy behaves more like this.



You find fat tail distributions = unequal concentrations = steep gradients which tend to grow steeper and steeper over time all over the place. Be it income and wealth, or the distribution of company sizes, landownership etc. Agglomerations and segregation are clear symptoms of out of equilibrium systems and the development of tremendous accumulated current account deficits on one side and the development of accumulated current account surpluses on the other side are clear results of out of equilibrium trade. So it is no surprise that equilibrium theories will lead economic analysis astray as loanable fund theories do. Both ignore observable evidence to a large extend and  therefore they need to be considered to be misleading fantasies. I mentioned to Keen last night, that I consider Leon Walras the culprit, because it looks to me as Walras tried to copy Boltzmann for economics. Boltzmann advanced physics a big deal by introducing statistical mechanics. He was lucky in that way, that he looked at ergodic or quasi ergodic systems. And Walras and company were stupid enough or not knowing what they were talking about, when they steered economic thinking into a direction that assumes the economy to be an ergodic system. It is certainly not, because it is not the same thing when you let one man work for ten hours or ten men for one hour. A cooperating team of people can accomplish other things compared to a single person even when the number of mystical man months = $ paid for the work is the same. But when you apply a thinking and methods that are appropriated to deal with ergodic or quasi ergodic systems towards an obvious non ergodic system you lead yourself astray. And that is what mainstream economics does. The powerful predictions of Boltzmann based theory collapse as soon as you deal with a system that is driven out of equilibrium by a flow of energy. See the Benard experiment. Boltzmann is not able to explain when and why molecules/particles which are dancing the rhythm of random brownian motion all of the sudden start to march in circles like square dancers on a dance floor. And that is known for quiet some time but ignored in a disturbing stubborn way by mainstream economists who insist that an economy behaves and can be treated like an ergodic system that tends towards equilibrium by itself. And the list goes on as Keen shows very well in his famous book "Debunking Economics".
-
I have personally experienced the severe effects of that false thinking in economics at least three times in just 10 years.

1.) As someone who had and has good and close relationships (business and private)  with people in South East Asia, during the so called Asian crisis in 1997/98.
2.) As an engineer working for Hewlett Packard in silicon valley from early 1997 to late 1999 during the build up of what was later called the Dotcom bubble in 2000.
3.) As a german and european citizen, who wants to live in peace and good neighborhood with other european citizens regardless of what nationality they have since 2007.

So I have been wondering for quite a while what is causing the devastating boom bust cycles and why are the root causes, which appear to be quite obvious to me, not understood/addressed/dealed with by mainstream economics. And I am really sick of their fruitless discussions which are going in endless circles leading to nowhere for almost 9 years now.

During my research I came across the work of I.Prigogine, R.W.Werner, S.Keen, S.L.Eichner, Fargione et. al. , S. Bogs to name just the most important ones. And then I started to connect the dots and tried to developed what I call an "Out of Equilibrium Theory" or "Disequilibrium Economics". And then things started to make much more sense to me.
-
When you look at our economic system as an out of equilibrium system, a dissipative structure, which is driven out of equilibrium by a flow of energy = human work (enabled and levered by a flow of sun energy (stored in foods and in fossil fuels)), where humans apply their success recipe of investing and reinvesting surpluses to enhance productivity and gain control over and over again (=stochastic multiplicative process) and by doing so they create a hierarchical structure (=lower local entropy=power law distribution) you get a picture that makes much more sense compared to what mainstream economics based on walrasian equilibrium bull shit has to offer. You see the economy as a process that creates power law distributed results. And then you recognize what money really is. A mighty communication tool steering the flow of human work towards what the money sources (banks) think needs to be done. Hijlmar Schacht knew that and steered together with the top brass of german society the flow of german work into the preparation of WW2 and ultimately into a war economy. He did so under the eyes of the winners of WW1 by using/creating so called Mefo Wechsel which the Reichsbank accepted like money but didn't show up in the books as money. And after WW2 the german bankers steered the flow of work into the creation of a consumer society following the US example. So the flow of human work, leveraged by technology and fossil energy, not only creates a flow of products, which are consumed/dissipated over time, but it also creates and maintains a hierarchical structure where the money sources are at the top and the working class at the very bottom, with lots of layers of different functions (see power structure research, Ringburg Model) in between.

 Source

Those structures appear to concentrate power at the top by feeding the most valuable work results towards the top, where they are used to control the entire thing. The important thing to note here is, that all economic activity is embedded into this structure and therefore exposed to the power gradient, which tends to get steeper and steeper over time. Free markets are not places where equal powers meet for a fair trade. Markets are places where the one who can put the most money on the table gets what he wants. And prices for goods and services are always set in a cost plus fashion because profit=monetary surplus is the ultimate goal. Product and service offerings which can't yield a profit disappear. Only profitable offerings survive. And one of the most profitable offerings is money itself, created out of nothing, offered as a loan which must be re payed plus interest. With the power to create this mighty communication and steering tool out of nothing and the power to decide free who gets how much for what purpose and with what conditions attached to it, banks steer the economy. It  can be said, that nowdays the highly concentrated bank business represents the central planning bureaus of capitalism.

 Source

And when the central planning bureaucrats at banks too big to fail are making serious mistakes and misallocations, it has devastating consequences. One of the most disastrous thing they do, is feeding speculative asset bubbles with money out of nothing just to let them burst by reversing the money flows. This is happening over and over again and the amplitude of the crashes caused by this is increasing.
In 2007/2008 Ben Bernanke almost crashed the entire thing (11,12) by stopping/reversing a flow that was going on since the early 80s and piled up US IOUs worth 6400 US$ (treasuries alone) in the hands of non US economies around the world.

 (billion US$ foreign US treasury holdings as of Oct 2015)


(billion US$ foreign US treasury holdings)


(billion US$ US treasuries hold by China, FED, Japan)

And I still don't know what to think about this. Did he do that intentionally or was he just victim of serious (self) deception by false economic theories?
When you stop or reverse the money flow, you stop the flow of human work going into the system and with that you stop not only production of goods and services for consumption but the work that is needed to maintain the system structure. At this point in time it looks like the Fed under Yellen is going to repeat that mistake once again. And I fear all the war and struggle around us has its roots in this not understood behaviour of an out of equilibrium system in the hand of bankers. Therefore I am writing this and hope it will get somehow into the brains of influential people. If not, I fear the greed heads at the helm will overstress the most valuable resources we have. Peace and cohesion in and between our societies. When these resources are depleted by stupid decisions based on evidence ignoring theories/fantasies nothing will save us this time.

Sapere Aude!

Georg Trappe

Dienstag, 19. Januar 2016

Disequilibrium Economics 101 (Part1 / Rev 2.1)

To make ends meet in an modern monetary economy consumption has to match output. Therefore it is required to inject a stream of credit into the economy to avoid deflationary breakdown.
Why is that?
Because disposable income is always smaller then output.
Why is that?
Because prices can and are set in a cost plus fashion and the profit = monetary surplus gained by selling output at cost plus prices is more and more saved = accumulated in the financial system as monetary savings to build up liquidity and to generate income from interest and or speculation. This leads to a constant growth of bank balance sheets. If the cost plus priced output (flow) is exceeding disposable income (flow) by 5% an injection of a credit flow of 5% of output (flow) is required to keep output (flow) and consumption (flow) in balance. Since this flow of credit is accumulated, a linear growing economy shows an exponential growth of accumulated credit = debt accounts (stock). The same is true for the liability side of the banking balance sheet, where the savings (flow) are accumulated on savings accounts (stock). The idea/illusion an economy as a whole could repay its accumulated debt leads direct into a deflationary scenario and is terrible misleading. In an stable economy with constant output (flow) and prices set as cost plus prices to achieve profit a constant flow of credit has to be injected resulting in a linear growing debt (stock).

The graph below shows the development of credit flow (yellow), accumulated credit=debt stock (red) in an economy where cost plus priced output flow (blue) is exceeding disposable income flow (green) by 5% and output is growing in a linear fashion. The black line shows debt (stock) as a percentage of output=consumption=(disposable income+credit) (flows) and is approaching 250% after 100 periods/years in this example. After 37 years debt (stock) as a percentage of output (flow) crosses the 100% mark. If the savings (flow) = credit injection rate =growth of bank balance sheets is higher then 5% of output (flow) the periods/years needed to get to these marks is shorter. In this example growth of output in absolute terms is constant = linear so the YoY growth as a percentage declines in an exponential way towards 0 (see red line in 2nd picture). When you look at an economy that grows output in an accelerated fashion, with the aim to have a constant YoY growth as a percentage, all other things accelerate accordingly. However due to saturation effects things tend towards a constant output (flow) which requires a constant flow of credit and with that a linear growth of the debt accounts (stock) as long as a cost plus pricing can be set by mighty monopoles or oligopoly structures and drives savings accounts (stock) up.





In conjunction with the ever increasing concentration of real capital AND!!! financial capital (Fettaugensyndrom) this creates a severe problem, that leads into collapse and war when not dealed with in an appropriated way. When the economy approaches a debt level of 400% of output (all sectors have accumulated 100% of yearly output as debt) a mental barrier is reached, because everyone recognizes that this debt can't be repaid. Due to the concentration processes which run in parallel with the development described above, an absolute bizzar situation arises. Not only real capital like land, machinery, company ownership etc. concentrates more and more in the hands of a few, but financial capital like money as well. But that is the topic for Disequilibrium Economics 101 Part 2. Stay tuned.

Sapere Aude!

Georg Trappe

P.S.: Thanks to PFH007 to tweet the following picture, which inspired this thought/way to explain one of the severe problems of out of equilibrium economies.

P.P.S.: Here the data for Germany Aktiva=Total Debt = length of all banks balance sheet, BIP=GDP in billion Euros

Source

Donnerstag, 14. Januar 2016

Can a fair game yield rigged results?

The question may sound paradoxical to you but it is of some serious importance. Before I explain why, I would like to let you know that I consider mainstream economists intelligent idiots.

You may ask why is that?

Well because of:

1. They created a loanable funds theory out of nothing (a phantasy) and are defending it against all evidence (1);

2. They created general equilibrium theory out of nothing (just an other phantasy) and are defending it against all evidence (2 , 3); and,

3. They will most probably stop reading at this point and by doing so they will miss their chance to save the world and to win the next not so not so nobel  fake  Nobel Price.




Source

Now, back to the paradox question raised by a self-confess, not=so-intelligent non-economist. Let's assume a game/economy where returns on economic activity are distributed in the same manner as IQ ratings to a population .As you may know, the IQ of humans is the normal distributed capability of humans to deal with and solve analytical and logical problems. Here's what a "normal" distribution may be expected to look like: normal distribution 

Source

So an IQ of 100 tells you that the person has an average intelligence in respect to solving the type of analytical/logical problems as they are presented in an IQ test. A typical test done with a representative sample of people yields this average of 100 with a sigma of 15, which means that 68% of the people will have an IQ between 85 and 115 or 95% of the people will have a IQ test result between 70 and 130. Now back to our game/economy, where returns on economic activity are distributed among the population (players) with a similar distribution as IQ. When everyone invests 1$ (out of an equally-distributed initial starting pool of investable wealth) and receives an arbitrary return on it, that is drawn out of a pool of returns with a normal distribution (just as with the IQ), the distribution of results would look like the distribution of IQ. If the game is a zero-sum game, where the returns are paid out of the pool of investments collected beforehand, 68 % of people would have between 85 and 115 cents, 95% between 70 and 130 cents with an average of exactly 1$. If the game is a game where because of some magick the pool of invested $ shows some growth of for example 5% during the time between investment and distribution of results, the average will shift from 100 cents to 105 cents but the shape of the distribution will not change. So it looks like the system behaves like an equilibrium system where the gains of some are the losses of others, due to an arbitrary but fair and normal distribution of returns. It is at this point where the intelligent idiots of mainstream economists led the "science" of economics astray.They ignored (and continue to ignore) the findings of Pareto and Gibrat.  What do I mean? When an economy is an ongoing, continuing process where something like above is repaeted over and over again. The twist is, this outcome cannot be accomplished in an additive way, but rather in a multiplicative way. In the next round the one who lost 15 cents can only reinvest his remaining 85 cents and the one who gained 15 cents will most probably reinvest his 115 cents. And when that is done over and over again, the accumulated results take on a completely different distribution: and that distribution looks more like the results of a rigged game. The wealth distribution (cumulative results) is transformed from an equal distribution at the start (every one has 1$), to a distribution that looks like a normal distribution (after the first round in this example) to a log normal distribution with an ever increasing inequality=distance between mean, median and mode.


Source

And this outcome is true independent of some magick, that lets the economy as whole grow, stagnate or shrink. I consider the ignorance of this the cause of rising instabilties in economies all worldwide. It leads to disintegration of societies which used to function optimally. Revolutions, class warfare, and even hot-wars between economies and the decay of economies, which used to be examples of the "right way" to run things. All that has its roots in the ignorance of what is typical for an out-of-equilibrium system (driven out of equilibrium by an endless, repeated stochastic multiplicative process). By the way, a lot of people may consider me to be an above-average intelligent but somewhat arrogant fellow. I like to think I am not. I tested my IQ just recently. It turned out to be 98. Just a regular guy!

Sapere Aude!

Georg Trappe

      Richard A. Werner



PLOS

  • Published: July 21, 2011
(3) Breaking the Bad Habits of Economics: put that "equilibrium" out
      Steve Keen 

P.S.: The main purpose of this article is to get rid of this absurd equilibrium kind of thinking.
However, the starting capital is not equally distributed as described in the example above. And later injections aka magick aren't either. It is the decision of Banks who gets how much for what purpose and under which conditions. And with that power they steer the economy (into war as Hjalmar Schacht did in Germany after WW1 or into a consumption society like it was done in Germany after WW2).  In early phases of a build up this appears to work ok, but when the economy is up and running, it drives one perversion after another.

P.P.S:
I would like to thank WesFree  very much for editing and polishing up my not so good English.

I recommend his twitter feed where he documents a lot of very interesting findings regarding money and money systems.

I also would like to thank Colin McKay for his outstanding work on the history of magick ;-).
I learned a lot from him and I gained a much better understanding about the deep roots of money magick  and double entry book keeping.
Breaking the Bad Habits of Economics: put that “equilibrium” out! - See more at: http://www.debtdeflation.com/blogs/2015/08/27/breaking-the-bad-habits-of-economics-put-that-equilibrium-out/#sthash.kzHCnpAa.dpuf