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Project to Investigate the Physical Aspects of Financial Imbalances
Dear Friends,
November was a busy month as further progress was made in shaping the vortex hypothesis of
market activity to contemporary macroeconomic and financial conditions amid concerns
expressed by high-level policymakers regarding economic imbalances in the US, Asia, and
Europe.
Policy-level and popular acceptance of the vortex hypothesis will eventually need mathematical
substantiation, but the primary task at present, under the 90-Day Structured Study, is to move
forward on its logical aspects in order to establish a reasonable set of variables, analogous to
those in the world of physics, upon which values based on economic data can be tested, analysed,
and interpreted. These economic variables will be developed according to their assoications with,
and analogs to, the thermodynamic variables of pressure, volume, and temperature as well as the
vortex variables of core, gradients, velocity, and vorticity.
Team and “grassroots” efforts are proceeding adequately. Enquiries are being made in the US
and Europe for academic support for this Project to carry out next year’s “Formal Work Plan”. A
long report or short book summarising the 90-Day Structured Study is on schedule to be
completed in January 2010.
Sincerely yours,
Jack Sustman, Managing Director
December 2009
Introduction. We are witnessing a global economic crisis that presently lies in abeyance.
Neither financial nor monetary stability on a global scale has been achieved, despite the
semblance of both in recent months.
Large central banks have provided enormous levels of funding to the financial sector during
2009. This liquidity has accounted for much of the recovery in asset prices and the restarting of
other markets from what appeared to be a moribund state earlier this year. Some analysts have
quite reasonably suggested that the large gains since early March have come in response to
oversold markets which did not adequately reflect long-term fundamentals.
This quasi-cyclical rebound has masked severe structural difficulties in the US, the UK, and
other countries and jurisdictions which followed the debt-heavy “finance for growth” model. The
financial crisis that began over two years ago has now entered into a vexing new phase in which
emergency measures will still be needed but, in many cases, will no longer be affordable.
Three aspects of today’s economic situation appear to be causing some friction among
policymakers and publics: large central banks’ monetary policies; the US government’s fiscal
policy; and the external exchange rate of the Chinese renmimbi. The first two of these account
for large net buying pressures (P in vortex notation) as market structures (V) are still on a trend
retreat, especially in the overbuilt “large, complex financial institutions” sectors of the US and
UK. Net transactions flows (T) have recovered, but remain sporadic. While research still needs
some several months to come to substantive conclusions, it appears that the exchange-rate
mechanism does not lend itself well to a comparative study in simple vortex terms unless many
other complicating factors, including cross-border trade, are taken into account.
The theoretical platform this Project seeks to develop, featuring a vortex hypothesis atop a
thermodynamic approach, suggests that large amounts of liquidity (P) may be seen as providing
the ground not only for renewed investment activity (T) but also for a gradual rebalancing of US
household and corporate balance sheets (V). Still, comparisons to the Japanese experience in the
1990s and 2000s continue to be relevant for the United States as enormous fiscal support and
near-zero interest rates might not be sufficient to help return to the economy to buoyancy any
time soon. Instead, financial as well as fiscal and monetary policies are needed: small lenders
and community banks, subject to appropriate regulation, need to continue to provide loans to
creditworthy small businesses. Such US structural reform (V) would permit money supply (P) to
more effectively service demand (T). These monies can then be recycled once loans are paid
back.
In this scenario the US dollar, which has been the world’s official (and then unofficial) reserve
currency since 1944, might be headed for a decline, over the course of the next several years, in
its external exchange value. This eventuality may be seen, at root, as consonant with a primary
US goal of the post-World War II period, namely to provide an environment in which other
countries can attend to their own development in line with electoral ideals and market-based
systems.
Progress in the Project to Investigate the Physical Aspects of Financial Imbalances is outlined
below.
Project highlights:
Project track (i): Theoretical / scholarly approach.
 A substantial report or short book on the vortex hypothesis and its underlying
thermodynamic basis is well-advanced at this stage in the 90-Day Structured
Study. A news conference will be called to announce the release, expected in
January, of the report/book (see “Grassroots / public approach”, below). In
addition, several summaries and precises in simple language explaining the vortex
approach are being prepared.
 Placement of the vortex hypothesis and its thermodynamic basis within the
“turbulent market” class of theories was recently substantiated with feedback
from Mathias Drehmann of the Bank for International Settlements, who expressed
interest in the idea of asset-price booms and busts as “hurricanes” (see “Academic
/ policy approach”, below). Although the macro and financial aspects of the
vortex approach are for now seen as a subset of turbulence theories, they might
rather come to comprise a more general theoretical framework upon which
different theories, or even classes of theories (such as the “turbulent markets”
class), may be based.
 Further progress in sharpening the analogies between the physical and economic
variables has also been made. The goal here is to structure a rudimentary model
(or set of models) featuring variables upon which values can be based. The model
– involving different market sectors, segments, or jurisdictions - could then be

tested, with results as well as associated analysis and interpretation enhancing the
feedback cycle between model and theory. Reconciliation of the equilibrium
thermodynamic relation with the disequilibrium vortex equations remains a major
goal of the mathematics.
The “Vortex Hypothesis of Asset Prices” was recently published in Institutional
Risk Analytics, www.institutionalriskanalytics.com, Christopher Whalen,
Publisher.
Project track (ii): Essential funding.
 Several prospects are available for the funding of 2010’s “Formal Work Plan”.
The Formal Work Plan and its associated budget will provide funding for physics
students to carry out basic exercises; for the production of written output that
further refines the analogs and sketches out a test scenario; and for the
implementation of a marketing program that will introduce this Project to its
intended audience in as rapid a fashion as theoretical developments and
contemporary circumstances warrant. A total budget of $65-75,000 is envisioned
for all of 2010.
 A fundraiser is being planned for Winter 2010 following the completion of the
90-Day Structured Study. Budgets continue to be tight for many people but an
estimated 100-150 people at $100 per person, plus internet-based and large-donor
contributions, will be sufficient to fund the “Formal Work Plan” through June
2010.
Project track (iii): Academic / policy issues.
 Mathias Drehmann has replied to a follow-up e-mail requesting that the Bank for
International Settlements provide feedback in light of its request for information
on the vortex-thermodynamic approach following its call for economic
researchers investigating the nexus between financial stability and
macroeconomic policy to provide “barometers rather than thermometers of (future)
financial distress”. Drehmann’s reply included a request that more empirical data
be made available, since the vortex hypothesis is currently more a
phenomenological description than a testable theory. Sections Four and Five of
“Toward a More Rigourous Post Keynesian Theory and Policy” are thus being
forwarded to the BIS. This paper, dating from 2008, traces the development of
the vortex hypothesis and sets the imbalances of 1990s Japan, the 1990-91 US
recession, the 1997-8 Asian and Russian financial crises and the 2000-01
NASDAQ in vortex terms. At bottom it seems that, despite important work by
Borio and Lowe (2003), significant signals of future international financial
distress cannot be reliably distinguished from the normal market-based noise of
financial dynamics.
 The “Statement of Interest” from Professor Michael Marder of the University of
Texas at Austin, described in the November letter, suggests that there is a serious
need for analysis of the economic situation as a complex interactive system.
 Other major figures are being contacted in view of the growing dissatisfaction
with the “bubbles” concept, as evidenced by Professor Allan Meltzer’s paper at
the Chicago Fed Conference, entitled “Bubbles?”, which questioned the
applicability of the term for use in an economic and market context.
Project track (iv): Grassroots / public relations issues.
 Project study teams are experiencing end-of-semester and holiday-season delays
as members of the loose discussion group have usually been available only for
one-on–one talks. In any case there are indications that group discussions will
need to evolve into more specialised talks regarding, say, the mathematics of the
vortex equations; the analogies between physical and economic pressure, volume,
and temperature as well as the vortex variables, including core, gradients, velocity,
and vorticity; strategic considerations for the Project; and production and
administrative tasks.
 The interactive “wiki” site established last month is up and running, with some
draft work available and with contributions still requested on some twenty
fundamental questions relating to the vortex hypothesis. The report/book (See
“Theoretical / scholarly approach”, above) will be posted to the wiki site,
http://pvtwiki.wiki-site.com.
 Assistance might be requested through a human resources provider for physics
enthusiasts to execute the purely formal exercises outlined in Phase One of the
2010 “Formal Work Plan”.
 In light of the obvious impact that a visual representation of vortex activity
usually makes, a short video is being planned to post to YouTube and other sites,
some two to three minutes in length, that will present the market vortex story and
put it into today’s economic context. If this medium ultimately proves successful
to the extent that it has seemed promising, two more videos - a 12-minute
“infomercial” clip and a thirty-seven-minute “classroom-ready” piece - will be
produced in early 2010. A lecture at an interested center of learning to draw
people to the site and the project is also under consideration.
 The general public has also been made aware of the serious problems with the
“bubbles” approach through recent PBS and World Forum airings of expert
disaffection with the bubbles description of economic booms and busts.
Summary. The recent period of calm has been shaken by distress in Greece and Dubai, which
may portend distress in other countries of the euro-zone and elsewhere in Europe as well as the
Gulf states of the Mideast. There continues to be a sense of urgency in developing this Project
so that its potential may be realised sooner rather than later. Even though the vortex hypothesis
has been in development for over ten years, it has been characterised, not unfairly by some
standards, as still being in its early stages. (Indeed, very recent insights might broaden the scope
of these investigations into the electromagnetic realm.) With ample feedback from researchers
and the establishment of working groups whose members can, in short order, learn to talk with
each other in a melded language of economics, physics, and interactive systems, common
understandings may be available and insights gained. By next month’s January newsletter, some
major output – either a substantive report or a short book - should be available. We look forward
to the completion at that time of the 90-Day Structured Study and the subsequent commencement
of the 2010 Formal Work Plan.