In a refreshing departure from the norm, the Wall Street Journal (WSJ) published a piece on April 20, 2009 on the Egyptian economy, and did it in the style of good journalism. Titled "Egypt's Gamal Mubarak Aims to Underpin Growth," the piece clearly shows that when the Journal decides to do so, it can switch from a style of reporting that is dumb and juvenile to one that is smart and mature. And when it does this, it performs a valuable service to the readers who want to invest in a market they wish to know a little more about.
This being the case, it is now possible to engage in a serious discussion on what goes on in the business world of the Middle East and North Africa known as the MENA region. But before we get into the specifics, a general observation must be made concerning the developing countries. It is that they use a different approach when tallying the figures that pertain to their national economies. Unless you know this and you have a minimum grasp of the details, you cannot paint in your mind a clear picture of the business opportunities that exist out there.
It is generally acknowledged that the developing countries do not tally up all the business activities taking place within their borders because many of these activities are done on a small scale without being recorded on a ledger of any kind. In some cases as much as 50% of the business activities escape recording; therefore the value of the Gross Domestic Product can be underestimated by this much if not more. And if your business is of the type that will depend on the purchasing power of the country where you intend to invest, the GDP figures as stated can mislead you. But the factor that distorts the figures even more in some jurisdictions is the translation of the currencies; and this is the focus of this discussion.
First, we look at the countries that are affected to a minimum degree by currency translation, and they fall into two categories. There is the group that interacts very little with the outside world such as Syria and Yemen. These countries take in a minimum amount of foreign currencies and so they tally their GDP mostly in one currency, their own. Then there is the group that interacts a great deal with the outside world such as Kuwait and Dubai where they receive a great deal of foreign currencies and where the economy is practically dollarized. Here too, very little currency translation is done therefore the tally is only affected to a small extent.
Where the problem of currency translation is acute is with countries like Egypt and Morocco where there is a fairly large and diversified economy that is produced by a workforce serving the local population and the outside world. These countries receive a fair amount of foreign money from the export of goods and such services as tourism. In the case of Egypt, there is also the income received from the Suez Canal and from the Suez-Mediterranean (SUMED) pipeline.
To see how this situation can confuse the tallying of the economic figures, we take an example expressed in round figures (not too different from the actual figures) that make up the Egyptian economy. In a given year, the country’s GDP expressed in Egyptian Pounds (EP) is 850 billion. Of these, 700 billion is generated from activities pertaining to the local markets while the remaining 150 billion represent the income earned from the export of goods, from tourism and from the revenues of the canal and the pipeline. Together, the last 4 sectors bring in 30 billion US dollars which convert roughly into the aforementioned 150 billion EP.
Simple calculations will show that 82% (700 billion) of the Egyptian GDP is made of the goods and services produced for the local market while 18% (150 billion) is made of the goods and services produced for the foreign markets.
Given that this GDP is produced by a workforce of about 25 million people, when you apply the above percentages to the force, you come up with these figures: 20.5 million workers should be producing goods and services for the local market, and 4.5 million should be producing for the foreign markets. But when you check the actual figures, you find that only a million workers or thereabout are responsible for earning all that foreign money. And you get the feeling that you are missing something.
You check what skills the workers of the latter group possess that make them produce on a per capita basis 4.5 times as much as their counterparts in the rest of the economy. But to your surprise you find that the majority of these workers possess the lowest of skills. In fact you find them to be working in the hospitality industry, in food processing, farming, textile, leather works, carpet making and furniture – all of which are traditionally very low skilled jobs. By contrast, you find that those who produce for the local portion of the GDP are engaged in construction, mining, engineering and the utilities, or they are immersed in the production of heavy machinery, pharmaceuticals, transport equipment, hi-tech products and the like – all of which are traditionally high skilled jobs. And so you ask the question: What is going on?
Well, what is going on is that in Egypt as in most developing countries they maintain two systems of accounting; some would say two sets of books. One set is maintained in the local currency while the other is maintained in foreign currencies. The reason why they do this is a subject for another discussion; what is pertinent to this discussion is the distorting effect that this approach has on the figures making up the GDP. And because the figures are distorted, they project a false picture of what goes on in those countries, something that confuses potential investors and may even keep them away.
Another example of figures that baffle the people who know little about these countries came up in the April 20 article of the Wall Street Journal. It was reported that the consumption of steel and cement in Egypt has been growing by 20% or more. In fact, when you look at all the sectors of the economy, you find that many have been growing at a rate comparable to that, yet the GDP is said to have been growing by only 7%. But math and economics will say that when most of the sectors grow by 20%, it is nearly impossible for the overall economy to grow by only one third of that. You therefore conclude that something about these figures is amiss and again you ask the question: What is going on?
To answer the question we go back to the GDP figures. It was reported in the same article that the growth rate this year has been reduced to 4% from the 7% that it was before the world economic crisis hit. This means the GDP is being produced at a clip that will eventually register 850 x 1.04 = 884 billion Egyptian pounds. It was also stated (but not reported in the article) that the country’s income in foreign currencies has been reduced to about half of what it was, meaning it went down to 75 billion EP. Thus, we can find the portion contributed to the GDP by the local activities from the following subtraction:
884 – 75 = 809 billion Egyptian pounds
So then, the local portion of the economy will be growing at the following rate:
((809 – 700) / 700) x 100 = 15.57%
This is astounding but true. It says that despite the world economic crisis or perhaps because of it, the local portion of the Egyptian economy will grow at a rate that exceeds 15% during this year and for the foreseeable future. When you take these observations into account and you apply them to everything else in the country, you get an indication as to how the middle class is faring economically.
More specifically, these observations say that the purchasing power of the Egyptian people is high enough to compare favorably with a country whose per capita income looks on the surface to be five times or even ten times higher. And when you realize that Egypt has a young population of 80 million people, you see that the potential for future growth looks bright for the country and for your investment should you decide to put your money there.
In fact, when the smart money tries to determine the business opportunities that exist in a country, it looks at the state of the middle class. When you do this and you add to it the fact that Egypt has liberalized the investment procedures for foreign capital to come into the country and has allowed it to participate in all sectors of the economy, you will understand why Egypt has become the destination of choice for the smartest of money these days.
Perhaps the Wall Street Journal has realized that it is better to reflect reality and take advantage of the opportunities it offers than reflect a fantasy to score a few cheap hits and get thrilled by them. Whatever the reason for the change of heart, we should be happy for what happened and say in all sincerity: Welcome home, Wall Street Journal! May you repeat the good work again and again.
Saturday, April 25, 2009
Saturday, April 18, 2009
The Organic Brain And The Cats Whisker
There are those who think of the economy as an edifice made of a static architecture such as a house that can, however, be renovated or modified. And there are those who think of the economy as a living organism that is constantly evolving such as when it grows and ages perhaps to die and be reborn, and go through another cycle of life.
When something goes wrong with the economy and the ideas are expressed as to the best way to fix it, you see a difference in the approaches taken by either camp. The static edifice camp speaks in terms of adding a component to the economy as if adding a room to a house, or in terms of eliminating a component as if taking down a garage. By contrast, the camp of the living organism advocates a remedial approach akin to the reliance on the body to heal itself in addition to which you may administer a little bit of therapy.
A prescription often recommended by the camp of the static edifice is to add an extension they call innovation to the existing architecture. But when you ask them to elaborate, they only repeat the refrain that innovation is the best way to become competitive, to increase your market share at home and to open new markets abroad. And it is this lack of direct response that shows how much their view of the economy is at variance with reality. This attitude also lends credence to the opposing view which is that the economy looks more like a living organism.
In this latter view, an economy that is constantly evolving is one that is innovating all by itself, therefore you do not need to innovate it artificially. When something goes wrong, it is not that the organism has lost the ability to innovative, though such thing can happen at times, but that something toxic has entered the body making it sick. So you help it heal itself by removing the toxicity and boosting its vigor where you see weakness.
When we look at the economies that were the first to industrialize since the beginning of the industrial age, we are struck by the fact that all but one were destroyed in whole or in part by war at least once before they were built anew. Consequently, these economies never had the chance to grow old and leave a detailed historical record as to how the process of aging progresses. The one economy that escaped destruction is the American, and it is the one that is now showing signs of aging though it is far from being a wreck.
Moreover, when we study America we must be mindful of the fact that this is a vast country which takes in immigrants. Thus, while parts of its industrial landscape are as old as the Industrial Revolution and have the look of old, the other parts look as new as the rising industrial tigers of Asia. And so, America remains today an industrial power to be reckoned with thanks to the science and the technologies that were developed on its soil by the newcomers.
Without these activities, all of America would now be looking like the rust belt of the old industrial states and be a complete record of an industrial power that aged and became a wreck. But America was spared this fate and the consequence is that we do not have, anywhere on this planet, a model by which to judge an ailing economy and know how to treat it. We must therefore rely on our intuition and our imagination.
The reason why artificial innovation such as the one called for by the camp of the static edifice does not work is that innovation is an organic phenomenon therefore a natural thing that cannot be made artificially. You can simulate innovation but you cannot create a genuine form of it, much less force it onto an economic system. To see how this relates to the fate of an industrial power it is necessary to see the difference between natural innovation and a simulated one. The following example highlights the differences.
Walk into a primitive village where people are going about their lives in their natural naked state. You will think for a moment that you have discovered a place never seen by someone from the civilized world before. But then the village elder fetches a magnifying glass and uses it to concentrated the sun rays onto a pile of dry leaves and lights up a fire to welcome you. You instantly deduce that someone has been here before. But why were you able to make this deduction? Because nothing in the village suggests that these people have the capability to manufacture a magnifying glass.
Even though you did not study the history of science or technology, you know instinctively that to make a magnifying glass you must have evolved through several stages from the making of a chisel to making the magnifying glass. First, you used the chisel to skin animals but then used it to make an instrument that aided in the development of a more advanced tool that helped in the discovery of a scientific principle that gave the impetus to invent a new product that was used to make a more advanced tool and so on till the magnifying glass. And all these stages of development would have left signs of an industrial base at a level of sophistication that is higher than what you saw in the village. In the absence of such signs you correctly deduced that someone must have brought the magnifying glass from outside the village.
Now, take a number of children from this village to your civilized world. Send them to school and to university where they study science and engineering. They go back to the village and see that it has not changed since they left. They decide they want to change the situation but they are divided as to how they should proceed. Some wish to accelerate things and leapfrog to bring the village to full modernity within a generation. Others wish to implement a more organic approach whereby they will bring opportunity to the village in the form of education and let things develop according to their natural rhythm. The first approach represents a simulated evolution, the second a more organic one.
We let these people decide what they want to do and look at an example that may seem different on the surface but is really similar in many ways. Researchers are fascinated by a lab curiosity they nickname the cats whisker but nobody does anything with it for several decades beyond whipping up a primitive crystal radio. Then, a handful of scientists and engineers in America make a better use of the thing by inventing a contraption they call the Junction transistor for which they find a number of useful applications. The people in Europe and Japan get their hands on the transistor, reverse engineering it and develop a few more applications. After a short while, the cumulative weight of all these applications changes the world like no one could ever imagine at the start of this journey.
The Junction transistor was in fact the quintessential organic innovation of the mid Twentieth Century because it grew out of a natural situation that sat untouched as a cats whisker for many decades. No one did anything with it all this time because the science that would be associated with it did not yet exist and neither was the technology that would be necessary to develop the applications. But when all the parts came together and the first transistor was invented, a number of other types of transistor followed like an avalanche, all artificially innovated and each developed to serve a special need. And while the original invention changed the world, the artificially developed ones caused little or no change beyond what they were developed to do.
A simple and legitimate question must now be asked: What if the principles of the Junction transistor were stumbled upon by a lone genius sitting in a lab somewhere in the Third World! Would this have started the revolution that took place in America? The answer is no, it would not have started a revolution because there was not an industrial base in the Third World that could have sustained an effort capable of perfecting an invention of this complexity or make possible the applications that followed. Even America had to wait several decades before seeing the cats whisker take flight and become a transistor.
This point is of utmost importance because those who do not understand its implications make mistakes that cost them a great deal in terms of lost time, wasted money and the drain on their talent. In fact, the politicians in some underdeveloped countries seek to accomplish the impossible by trying to leapfrog ahead of the advanced nations while ignoring the fact that their country lacks an industrial base advanced enough to sustain the work that will be needed to realize their dream.
And not only do the politicians pounce on discoveries made by their subjects at home, they pounce on discoveries made elsewhere as well. In this, they are powered by the desire to produce in their country goods that will sell all over the world carrying a label that says where the goods were made. But after much wasted expenses, the leaders fall on their faces as they realize they cannot make the second step because they neglected to make the first step.
Surprisingly however, this is a bad judgment that is not confined to the underdeveloped countries because the somewhat more advanced developing countries have also fallen into the same sort of trap. And even more surprising than this is the fact that some advanced and fully developed countries do sometimes suffer the same fate as can be seen from the following three examples:
First example: The old Soviet Union was pushed to near bankruptcy because it lacked the industrial base that could sustain the arms race which was imposed on it by the re-arming of America.
Second example: Although it occupied a place at the leading edge of science and technology, Japan failed to complete the invention and development of the "Fifth Generation Computer" because it could not artificially simulate the series of organic innovations that would have led to the desired result. And Japan abandoned the effort never to return to it.
Third example: America started several new technologies it could not fully develop because it neglected to renew the industrial base it once had. The Asian countries grabbed those technologies, turned them into useful products and sold these to the Americans. This caused an imbalance in trade patterns that may have altered the course of history.
The lesson to be drawn here is that the government must not push scientists and engineers to invent the equivalent of the Junction transistor because this can only happen spontaneously where organic innovations have flourished. What the government can and should do instead is give incentives to encourage the scientific and technological establishment to develop the equivalent of the special transistors once the principles underlying an invention have been understood.
What this means in terms of the energy situation is that governments should promote conservation by encouraging the development of energy efficient transportation, machinery, appliances, procedures, buildings et cetera in order to save on energy. As for the breakthroughs that may someday lead to new sources of energy – like fusion power for example -- this will happen when the "bulb" will go on spontaneously in the organic brain of a human being such as it cannot happen in the silicon circuits of artificial intelligence.
Finally, to be "green" is to let nature take its course especially when the effort involves the search for ways to sustain our human civilization. What is stressful to the natural order of things is the impulse that some human beings have to control every situation by artificial means. And this includes the impulse to "green" the planet through the use of false pretenses known as smoke an mirrors. We must therefore keep under check the clowns that adopt these methods, and in so doing help relieve the stress on the one and only planet we have. Earth has brought us this far over the millennia and the control freaks who cannot control their impulses must now be controlled by the rest of us or they will mess up the Planet for good.
When something goes wrong with the economy and the ideas are expressed as to the best way to fix it, you see a difference in the approaches taken by either camp. The static edifice camp speaks in terms of adding a component to the economy as if adding a room to a house, or in terms of eliminating a component as if taking down a garage. By contrast, the camp of the living organism advocates a remedial approach akin to the reliance on the body to heal itself in addition to which you may administer a little bit of therapy.
A prescription often recommended by the camp of the static edifice is to add an extension they call innovation to the existing architecture. But when you ask them to elaborate, they only repeat the refrain that innovation is the best way to become competitive, to increase your market share at home and to open new markets abroad. And it is this lack of direct response that shows how much their view of the economy is at variance with reality. This attitude also lends credence to the opposing view which is that the economy looks more like a living organism.
In this latter view, an economy that is constantly evolving is one that is innovating all by itself, therefore you do not need to innovate it artificially. When something goes wrong, it is not that the organism has lost the ability to innovative, though such thing can happen at times, but that something toxic has entered the body making it sick. So you help it heal itself by removing the toxicity and boosting its vigor where you see weakness.
When we look at the economies that were the first to industrialize since the beginning of the industrial age, we are struck by the fact that all but one were destroyed in whole or in part by war at least once before they were built anew. Consequently, these economies never had the chance to grow old and leave a detailed historical record as to how the process of aging progresses. The one economy that escaped destruction is the American, and it is the one that is now showing signs of aging though it is far from being a wreck.
Moreover, when we study America we must be mindful of the fact that this is a vast country which takes in immigrants. Thus, while parts of its industrial landscape are as old as the Industrial Revolution and have the look of old, the other parts look as new as the rising industrial tigers of Asia. And so, America remains today an industrial power to be reckoned with thanks to the science and the technologies that were developed on its soil by the newcomers.
Without these activities, all of America would now be looking like the rust belt of the old industrial states and be a complete record of an industrial power that aged and became a wreck. But America was spared this fate and the consequence is that we do not have, anywhere on this planet, a model by which to judge an ailing economy and know how to treat it. We must therefore rely on our intuition and our imagination.
The reason why artificial innovation such as the one called for by the camp of the static edifice does not work is that innovation is an organic phenomenon therefore a natural thing that cannot be made artificially. You can simulate innovation but you cannot create a genuine form of it, much less force it onto an economic system. To see how this relates to the fate of an industrial power it is necessary to see the difference between natural innovation and a simulated one. The following example highlights the differences.
Walk into a primitive village where people are going about their lives in their natural naked state. You will think for a moment that you have discovered a place never seen by someone from the civilized world before. But then the village elder fetches a magnifying glass and uses it to concentrated the sun rays onto a pile of dry leaves and lights up a fire to welcome you. You instantly deduce that someone has been here before. But why were you able to make this deduction? Because nothing in the village suggests that these people have the capability to manufacture a magnifying glass.
Even though you did not study the history of science or technology, you know instinctively that to make a magnifying glass you must have evolved through several stages from the making of a chisel to making the magnifying glass. First, you used the chisel to skin animals but then used it to make an instrument that aided in the development of a more advanced tool that helped in the discovery of a scientific principle that gave the impetus to invent a new product that was used to make a more advanced tool and so on till the magnifying glass. And all these stages of development would have left signs of an industrial base at a level of sophistication that is higher than what you saw in the village. In the absence of such signs you correctly deduced that someone must have brought the magnifying glass from outside the village.
Now, take a number of children from this village to your civilized world. Send them to school and to university where they study science and engineering. They go back to the village and see that it has not changed since they left. They decide they want to change the situation but they are divided as to how they should proceed. Some wish to accelerate things and leapfrog to bring the village to full modernity within a generation. Others wish to implement a more organic approach whereby they will bring opportunity to the village in the form of education and let things develop according to their natural rhythm. The first approach represents a simulated evolution, the second a more organic one.
We let these people decide what they want to do and look at an example that may seem different on the surface but is really similar in many ways. Researchers are fascinated by a lab curiosity they nickname the cats whisker but nobody does anything with it for several decades beyond whipping up a primitive crystal radio. Then, a handful of scientists and engineers in America make a better use of the thing by inventing a contraption they call the Junction transistor for which they find a number of useful applications. The people in Europe and Japan get their hands on the transistor, reverse engineering it and develop a few more applications. After a short while, the cumulative weight of all these applications changes the world like no one could ever imagine at the start of this journey.
The Junction transistor was in fact the quintessential organic innovation of the mid Twentieth Century because it grew out of a natural situation that sat untouched as a cats whisker for many decades. No one did anything with it all this time because the science that would be associated with it did not yet exist and neither was the technology that would be necessary to develop the applications. But when all the parts came together and the first transistor was invented, a number of other types of transistor followed like an avalanche, all artificially innovated and each developed to serve a special need. And while the original invention changed the world, the artificially developed ones caused little or no change beyond what they were developed to do.
A simple and legitimate question must now be asked: What if the principles of the Junction transistor were stumbled upon by a lone genius sitting in a lab somewhere in the Third World! Would this have started the revolution that took place in America? The answer is no, it would not have started a revolution because there was not an industrial base in the Third World that could have sustained an effort capable of perfecting an invention of this complexity or make possible the applications that followed. Even America had to wait several decades before seeing the cats whisker take flight and become a transistor.
This point is of utmost importance because those who do not understand its implications make mistakes that cost them a great deal in terms of lost time, wasted money and the drain on their talent. In fact, the politicians in some underdeveloped countries seek to accomplish the impossible by trying to leapfrog ahead of the advanced nations while ignoring the fact that their country lacks an industrial base advanced enough to sustain the work that will be needed to realize their dream.
And not only do the politicians pounce on discoveries made by their subjects at home, they pounce on discoveries made elsewhere as well. In this, they are powered by the desire to produce in their country goods that will sell all over the world carrying a label that says where the goods were made. But after much wasted expenses, the leaders fall on their faces as they realize they cannot make the second step because they neglected to make the first step.
Surprisingly however, this is a bad judgment that is not confined to the underdeveloped countries because the somewhat more advanced developing countries have also fallen into the same sort of trap. And even more surprising than this is the fact that some advanced and fully developed countries do sometimes suffer the same fate as can be seen from the following three examples:
First example: The old Soviet Union was pushed to near bankruptcy because it lacked the industrial base that could sustain the arms race which was imposed on it by the re-arming of America.
Second example: Although it occupied a place at the leading edge of science and technology, Japan failed to complete the invention and development of the "Fifth Generation Computer" because it could not artificially simulate the series of organic innovations that would have led to the desired result. And Japan abandoned the effort never to return to it.
Third example: America started several new technologies it could not fully develop because it neglected to renew the industrial base it once had. The Asian countries grabbed those technologies, turned them into useful products and sold these to the Americans. This caused an imbalance in trade patterns that may have altered the course of history.
The lesson to be drawn here is that the government must not push scientists and engineers to invent the equivalent of the Junction transistor because this can only happen spontaneously where organic innovations have flourished. What the government can and should do instead is give incentives to encourage the scientific and technological establishment to develop the equivalent of the special transistors once the principles underlying an invention have been understood.
What this means in terms of the energy situation is that governments should promote conservation by encouraging the development of energy efficient transportation, machinery, appliances, procedures, buildings et cetera in order to save on energy. As for the breakthroughs that may someday lead to new sources of energy – like fusion power for example -- this will happen when the "bulb" will go on spontaneously in the organic brain of a human being such as it cannot happen in the silicon circuits of artificial intelligence.
Finally, to be "green" is to let nature take its course especially when the effort involves the search for ways to sustain our human civilization. What is stressful to the natural order of things is the impulse that some human beings have to control every situation by artificial means. And this includes the impulse to "green" the planet through the use of false pretenses known as smoke an mirrors. We must therefore keep under check the clowns that adopt these methods, and in so doing help relieve the stress on the one and only planet we have. Earth has brought us this far over the millennia and the control freaks who cannot control their impulses must now be controlled by the rest of us or they will mess up the Planet for good.
Saturday, April 11, 2009
When The Boomerang Makes A U-Turn
A boomerang is a stick you throw in the air away from you only to see it return and possibly hit you. This device and the way it behaves have been used to analogize the tendency that some people have to hurt others but end up being hurt by what they do. And this is what happened to America when it was invited to use Israel as a tool to control the Arab Middle East and its vast reserves of oil but ended up being controlled by the Jewish boomerang both at home and abroad.
Going past anything described in the Protocol of the Elders of Zion published some time ago, the Jewish Establishment has more recently been plotting conspiracies which make that Protocol look like a play for children written by Mother Theresa. Indeed, the aforementioned notorious Establishment started its conquest of America with the business of paralyzing every nerve center in the body of American life then went on to control the whole country one institution at a time. And that Establishment managed to accomplish all of this by promising something it knew it could never deliver but made the promise anyway to entice America to drop its guard and neglect to watch its back.
The diabolic ruse began with the promise that if America joined Israel in breaking the back of the Arabs, the American people will be rewarded with a daily swim in cheap Arab oil, and do so from now to the end of time. What happened instead was that America’s back was the one to be broken in the Middle East as well as everywhere else. And from the looks of it, that back will stay broken for all the time that is left between here and eternity. In addition to that, the American people were made to pay a high price for the oil that America failed to snatch from the Arabs and for the oil of everyone else that America never coveted in the first place. So much for the promises made by the devil.
This was not the first time that a group of charlatans came out of nowhere, anointed themselves leaders of the Jews and used the perennial tragedy of a people that vanished long ago to promise miracles they know they cannot deliver. Still, they labor mighty hard to fool enough of the people so as to gather all the wealth and the power they can gather then disappear into nowhere in the middle of the night as fast as they have appeared out of nowhere.
Just look at this heart wrenching story. America began its ascent to the pinnacle of power after World War II but made the mistake of taking on board what can be described as the distilled essence of evil itself, the same evil that ruined many an empire over the centuries. These were the people that America saved from the grip of Hitler’s master race not knowing that among them were the handful of charlatans that called themselves the chosen people of God.
Their mission in life as they never shy to tell it is to take control of the world, make it better and make it safer for themselves. And they demonstrated many times over how much better that is when they gave a display of their handiwork, the last display being the indiscriminate butchery of the unarmed people of Gaza.
To contrast the two faces of the one and same evil as they operated at different times, compare the work of the Nazis who were ashamed of their brutality and tried to hide it with the work of the self proclaimed chosen people of God who mobilized the cultural machine of America to sing their praises as they bragged about their savage exploits. You will find that primitive savagery was never glorified like it was when the people who are the most heavily armed on Earth were butchering the people who are the least defended on God’s Earth. Is this cowardice the authentic face of Judaism stripped of pretenses?
But these were the moments when the boomerang made a U-turn and came flying towards America because when you praise the savagery of someone you end up being eaten by the savage if not right away then later on. First, you are made to believe that a third party is the intended game and that you will share in the feast of eating the prey. But as surely as night follows day you will end up being eaten by the savage that conned you before you realize you are being eaten alive.
And like a sweet irony, the Arabs who were supposed to have been game in this sordid melodrama have instead survived and have also prospered despite the conspiracy. All the while, America which was supposed to swim in their oil and then feast on them while sitting as guest of honor at the table of the Jewish Establishment ended up being the entrée, the main course and the dessert for a host that is now preparing to relieve himself.
And to repeat the same story when America will be done with and set aside for good, the current crop of charlatans will most likely remain at their post till that magic moment when the plot will have reached its climax one more time. And it is at this point that the cowardly nouveau rich and the blatantly infamous will grab all the wealth that they have gathered and flee to a safer place under the banner of a new ethnicity and the sign of a new religion.
Guys like these have done it before as they left behind the innocent and the gullible to pay for their sins and pay for their conspiracies. And more of them will come at the end of this episode; more of those who will do it again and again as it has been done for centuries before. This sort of thing happens all the time because there are human leaches who will always seek to live the high life at the expense of those who listen to them.
In the meantime the image of America and the image of the charlatans who call themselves leaders of the Jewish people have become so transposable that when you speak of one it is often thought that you are speaking of the other. For example, the self assured America that crushed the war machine of Imperial Japan at the same time as it saved Europe from Hitler’s death machine is now said to be experiencing -- get this now – an "existential threat" at the hands of a handful of Arab kids who are challenging her soldiers in the back streets of the Arab Middle East. Are these the descendants of the brave soldiers who fought at Iwo Jima, on D-Day and the Battle of the Bulge? What did that Establishment do to you, America? Why did you let it diminish you this much?
But there is more to this sickening story. Stealing the American identity by the image makers of the self declared leaders of the Jews is not the only trick that is soiling the name and the image of America. What is equally toxic is that the media types of the Republic have been trained en masse to "balance" the news and everything that is opined in a way that reinforces the point of view of the Jewish leaders so as to perpetuate their never ending lies.
For example, to minimize the importance of Arab oil now that it is clear they cannot make America snatch it from its owners, the Jewish leaders invented – get this now – an "existential" threat for the planet to worry about. They have claimed that the planet was about to cook in the crematorium of a global holocaust because of something they termed the fossil generated carbon footprint. And so, every time a cold day comes along and makes a liar out of them, the media in America, in Canada and in Britain are required to "balance" things out by running stories that perpetuate the fallacy of a planet at peril whether or not there is news to warrant mentioning the subject of climate change.
Is this it? Are we done with this story? No, not yet because there is more to be said. There is the promise that America can regain its lost glory not by going after Arab oil which seems to be a lost cause at this point but by developing new technologies to produce energy. Advocating this idea is a reverse Don Quixote who is pushing the notion that America must learn to love and to embrace the windmill, not fear it as did the first Quixote. The new character promises that America can lead the world into a new age of plenty, and thus retake the dominion it used to control before the age of globalization came along and flattened the world.
But the windmill and the solar panel will do less for the American economy than they will for the economy of a small country like Israel. Thus, logic dictates that the intent behind making America spend billions of dollars on Research and Development to perfect these technologies is to have them transferred to Israel where there is no oil, natural gas, coal or uranium. And the burning desire is not for America to retake the world but for Israel to take the Palestinian homeland and keep it.
What is missing in the presentation of the modern Don Quixote and his comrades is the notion that in the age of globalization it is no longer what you invent that makes the big difference because everyone has the chance to adopt your invention and profit from it. In fact, for many decades now, America has developed technologies it never turned into usable products, leaving the honor to the Asian economies that made the products and sold them in the American market.
And to push their luck as far as it will go, the new Quixote and his comrades are planting fake stories in such publications as the New York Times about China being in a race to be first in the manufacture of the electrical car. The hope is that the American Congress will be goaded to appropriate billions of dollars -- borrowed from the Chinese of course -- to push America into that same phantom race. And why is that? Because Israel fell into a similar trap and discovered that the electric car will never be more efficient than those running on the other fuels. And so the new Quixote wants America to bail out Israel instead of bailing out General Motors of America. After all, even America has only a limited amount of money and cannot bail out both Israel and the American working families at the same time.
This must be it; there is no more to be said about this subject, right? Wrong again because there is one more thing to be said here. There is the love and hate game. Even before the Protocol of the Elders of Zion, the Jewish leaders were able to deflect the resentment that ordinary people felt in their regard. But instead of changing their ways and learning to live with the rest of humanity, the leaders made the claim that humanity suffered from a deficiency called anti-Semitism which they defined as the unprovoked hatred of all Jews.
To the surprise of the leaders the deflection worked to some extent. What happened was that in their eagerness to show they are not anti-Semitic but only resentful of the antics of the self-appointed leaders, the ordinary people of the world -- called Gentiles by the Jews -- bent backward to be nice to them. But true to themselves, the leaders latched on to the warm expression of the gentiles and exploited the situation to their advantage. They constructed a love-and-hate yardstick with which they graded individuals and societies alike. They took the yardstick to America where they used it in a perverted way to shape the country’s relationship with the rest of the world and thus shaped America’s foreign policy.
And so, like a stock market caught in the grip of a fever called volatility, you now have the Iranians loving and hating America two dozen times a day; the Latin Americans loving and hating America a dozen times a day; the Arabs loving and hating America half a dozen times a day; and the Europeans loving and hating America at least once a day. And so on and so forth, enough to make the Sphinx of Giza yawn out of boredom. Is this a way to run a country the size of America?
Going past anything described in the Protocol of the Elders of Zion published some time ago, the Jewish Establishment has more recently been plotting conspiracies which make that Protocol look like a play for children written by Mother Theresa. Indeed, the aforementioned notorious Establishment started its conquest of America with the business of paralyzing every nerve center in the body of American life then went on to control the whole country one institution at a time. And that Establishment managed to accomplish all of this by promising something it knew it could never deliver but made the promise anyway to entice America to drop its guard and neglect to watch its back.
The diabolic ruse began with the promise that if America joined Israel in breaking the back of the Arabs, the American people will be rewarded with a daily swim in cheap Arab oil, and do so from now to the end of time. What happened instead was that America’s back was the one to be broken in the Middle East as well as everywhere else. And from the looks of it, that back will stay broken for all the time that is left between here and eternity. In addition to that, the American people were made to pay a high price for the oil that America failed to snatch from the Arabs and for the oil of everyone else that America never coveted in the first place. So much for the promises made by the devil.
This was not the first time that a group of charlatans came out of nowhere, anointed themselves leaders of the Jews and used the perennial tragedy of a people that vanished long ago to promise miracles they know they cannot deliver. Still, they labor mighty hard to fool enough of the people so as to gather all the wealth and the power they can gather then disappear into nowhere in the middle of the night as fast as they have appeared out of nowhere.
Just look at this heart wrenching story. America began its ascent to the pinnacle of power after World War II but made the mistake of taking on board what can be described as the distilled essence of evil itself, the same evil that ruined many an empire over the centuries. These were the people that America saved from the grip of Hitler’s master race not knowing that among them were the handful of charlatans that called themselves the chosen people of God.
Their mission in life as they never shy to tell it is to take control of the world, make it better and make it safer for themselves. And they demonstrated many times over how much better that is when they gave a display of their handiwork, the last display being the indiscriminate butchery of the unarmed people of Gaza.
To contrast the two faces of the one and same evil as they operated at different times, compare the work of the Nazis who were ashamed of their brutality and tried to hide it with the work of the self proclaimed chosen people of God who mobilized the cultural machine of America to sing their praises as they bragged about their savage exploits. You will find that primitive savagery was never glorified like it was when the people who are the most heavily armed on Earth were butchering the people who are the least defended on God’s Earth. Is this cowardice the authentic face of Judaism stripped of pretenses?
But these were the moments when the boomerang made a U-turn and came flying towards America because when you praise the savagery of someone you end up being eaten by the savage if not right away then later on. First, you are made to believe that a third party is the intended game and that you will share in the feast of eating the prey. But as surely as night follows day you will end up being eaten by the savage that conned you before you realize you are being eaten alive.
And like a sweet irony, the Arabs who were supposed to have been game in this sordid melodrama have instead survived and have also prospered despite the conspiracy. All the while, America which was supposed to swim in their oil and then feast on them while sitting as guest of honor at the table of the Jewish Establishment ended up being the entrée, the main course and the dessert for a host that is now preparing to relieve himself.
And to repeat the same story when America will be done with and set aside for good, the current crop of charlatans will most likely remain at their post till that magic moment when the plot will have reached its climax one more time. And it is at this point that the cowardly nouveau rich and the blatantly infamous will grab all the wealth that they have gathered and flee to a safer place under the banner of a new ethnicity and the sign of a new religion.
Guys like these have done it before as they left behind the innocent and the gullible to pay for their sins and pay for their conspiracies. And more of them will come at the end of this episode; more of those who will do it again and again as it has been done for centuries before. This sort of thing happens all the time because there are human leaches who will always seek to live the high life at the expense of those who listen to them.
In the meantime the image of America and the image of the charlatans who call themselves leaders of the Jewish people have become so transposable that when you speak of one it is often thought that you are speaking of the other. For example, the self assured America that crushed the war machine of Imperial Japan at the same time as it saved Europe from Hitler’s death machine is now said to be experiencing -- get this now – an "existential threat" at the hands of a handful of Arab kids who are challenging her soldiers in the back streets of the Arab Middle East. Are these the descendants of the brave soldiers who fought at Iwo Jima, on D-Day and the Battle of the Bulge? What did that Establishment do to you, America? Why did you let it diminish you this much?
But there is more to this sickening story. Stealing the American identity by the image makers of the self declared leaders of the Jews is not the only trick that is soiling the name and the image of America. What is equally toxic is that the media types of the Republic have been trained en masse to "balance" the news and everything that is opined in a way that reinforces the point of view of the Jewish leaders so as to perpetuate their never ending lies.
For example, to minimize the importance of Arab oil now that it is clear they cannot make America snatch it from its owners, the Jewish leaders invented – get this now – an "existential" threat for the planet to worry about. They have claimed that the planet was about to cook in the crematorium of a global holocaust because of something they termed the fossil generated carbon footprint. And so, every time a cold day comes along and makes a liar out of them, the media in America, in Canada and in Britain are required to "balance" things out by running stories that perpetuate the fallacy of a planet at peril whether or not there is news to warrant mentioning the subject of climate change.
Is this it? Are we done with this story? No, not yet because there is more to be said. There is the promise that America can regain its lost glory not by going after Arab oil which seems to be a lost cause at this point but by developing new technologies to produce energy. Advocating this idea is a reverse Don Quixote who is pushing the notion that America must learn to love and to embrace the windmill, not fear it as did the first Quixote. The new character promises that America can lead the world into a new age of plenty, and thus retake the dominion it used to control before the age of globalization came along and flattened the world.
But the windmill and the solar panel will do less for the American economy than they will for the economy of a small country like Israel. Thus, logic dictates that the intent behind making America spend billions of dollars on Research and Development to perfect these technologies is to have them transferred to Israel where there is no oil, natural gas, coal or uranium. And the burning desire is not for America to retake the world but for Israel to take the Palestinian homeland and keep it.
What is missing in the presentation of the modern Don Quixote and his comrades is the notion that in the age of globalization it is no longer what you invent that makes the big difference because everyone has the chance to adopt your invention and profit from it. In fact, for many decades now, America has developed technologies it never turned into usable products, leaving the honor to the Asian economies that made the products and sold them in the American market.
And to push their luck as far as it will go, the new Quixote and his comrades are planting fake stories in such publications as the New York Times about China being in a race to be first in the manufacture of the electrical car. The hope is that the American Congress will be goaded to appropriate billions of dollars -- borrowed from the Chinese of course -- to push America into that same phantom race. And why is that? Because Israel fell into a similar trap and discovered that the electric car will never be more efficient than those running on the other fuels. And so the new Quixote wants America to bail out Israel instead of bailing out General Motors of America. After all, even America has only a limited amount of money and cannot bail out both Israel and the American working families at the same time.
This must be it; there is no more to be said about this subject, right? Wrong again because there is one more thing to be said here. There is the love and hate game. Even before the Protocol of the Elders of Zion, the Jewish leaders were able to deflect the resentment that ordinary people felt in their regard. But instead of changing their ways and learning to live with the rest of humanity, the leaders made the claim that humanity suffered from a deficiency called anti-Semitism which they defined as the unprovoked hatred of all Jews.
To the surprise of the leaders the deflection worked to some extent. What happened was that in their eagerness to show they are not anti-Semitic but only resentful of the antics of the self-appointed leaders, the ordinary people of the world -- called Gentiles by the Jews -- bent backward to be nice to them. But true to themselves, the leaders latched on to the warm expression of the gentiles and exploited the situation to their advantage. They constructed a love-and-hate yardstick with which they graded individuals and societies alike. They took the yardstick to America where they used it in a perverted way to shape the country’s relationship with the rest of the world and thus shaped America’s foreign policy.
And so, like a stock market caught in the grip of a fever called volatility, you now have the Iranians loving and hating America two dozen times a day; the Latin Americans loving and hating America a dozen times a day; the Arabs loving and hating America half a dozen times a day; and the Europeans loving and hating America at least once a day. And so on and so forth, enough to make the Sphinx of Giza yawn out of boredom. Is this a way to run a country the size of America?
Saturday, April 4, 2009
An Equation To Predict Future Crises
At a time when most people were arguing that the economy was doing well and getting better, a handful of other people were predicting the advent of the economic crisis we are now facing. It is obvious from this alone that we need a method by which to determine the health of the economic system, one that will warn us the system is about to collapse before it does. To put things in the form of analogy, we need to know how sick the patient is before he dies and thus prove that he was very sick indeed.
In economics as in science, the difference between something spiraling upward in a positive sense or the thing spiraling downward in a negative sense is the ability of the thing to create a surplus or a deficit. For example, the reason why we still cannot produce energy from the fusion of atoms is that in all the systems that the scientists have tested so far, more energy is spent to operate the system than the system can deliver at the output. A comparison between the input energy and the output energy has consistently shown that those systems were in deficit.
The same applies to a business as can be seen from this example: If your expenses are a million dollars a year and your earnings exceed that amount, you have a surplus, your model is sustainable and you will remain in business. But if the situation is reversed and your expenses exceed your earnings, you have a deficit and you will be out of business sooner or later.
The lesson to draw from this is that if you feel your set-up is not functioning well, you first check the bottom line to see if the model is sustainable. If the numbers show that despite the apparent troubles the set-up yields a surplus, you conclude that you have a workable model that may only need a tune-up. But if the set-up yields a chronic deficit, you must conclude that the model is not sustainable and that it should be overhauled or discarded.
Although this approach may work for a scientific set-up or a business, things become more complicated when it comes to the economic system of a country. The reality is that a country’s economy is of such size, it is divided into several sectors each of which containing many institutions, and each of those being defined by a myriad of numbers. It is nearly impossible to do a definitive testing of such a system using the standard procedure.
The way things are done in a purely capitalist system is that to some extent, the institutions experiencing a chronic deficit are allowed to go bankrupt. Thus, to determine whether or not the system as a whole can sustain itself, some people have suggested that all the institutions which are too weak to stand on their own be left to die. But this act will also bankrupt the entire country, a move that does not make sense given that the reason why we wish to determine the sustainability of the system is to save the patient before he dies. Consequently, the suggestion to let all weak institutions die must be rejected. But what is there to replace it?
Well, I wish to advance the theory that the economic system of a country can be tested to see if it will sustain itself by checking three key numbers: the money supply, the rate of inflation and productivity. And here is the equation that ties these numbers together:
M / (I x P) = C
Let me explain what this is about. I begin with the premise that a system is deemed to be stable or stagnant when the same number of workers making the same goods and services produce the same volume year after year. The system will be in chronic deficit if the workers produce less goods and services year after year; or it will be in surplus if the workers produce more goods and services. In fact, what is measured here is productivity, and this is represented by the letter P in the equation.
However, the trouble with a system as large as a country is that the demography is constantly changing, therefore the composition of the workforce is changing and so are the goods and services in demand. Thus, we cannot measure the numbers and compare them year over year with any accuracy, and we must therefore do something else. Luckily, another set of numbers can yield the desired result. These are the money supply (M) and the rate of inflation (I). Using these numbers as shown in the equation, we can determine the value of C.
From a purely aesthetic standpoint, it is tempting to wish that the C were a constant and that its value be a 1. But logic says that when human behavior is involved, nothing should be given an immutable value as an absolute constant. Thus the value of C in this equation must be considered a moving target that changes from time to time and from place to place depending on the sort of economy we have and the level of complexity that the economy has reached.
To see how the equation was constructed, we observe that there is a direct relation between the change in the money supply and the change in the rate of inflation because the two rise together and fall together. But when it comes to productivity and inflation, the relation is inverted because when one rises, the other falls and vice versa. It is easy to understand why this is so when we realize that a rising productivity makes more goods and services with less expenses which results in the reduction of prices.
Bringing these notions together, we can make the following mathematical argument: Inflation is proportional to the change in the money supply and inversely proportional to productivity. We express these words in symbols and we insert a constant to transform the proportionality into an equality. This becomes the equation which is then re-arranged and given a more elegant form such as shown above.
But before we start plugging numbers into the equation, we must put them in their proper form. Usually the numbers are given by some government agency as a percentage of the changes that take place year over year. For example inflation could be described as having risen by 5%. To plug this into the equation, we say that if last year’s prices were equal to 1, this year’s prices are equal to:
(1+ 5/100) = 1.05
And this is the number that plugs into the equation in lieu of the letter I. The same is done with productivity and with the money supply.
Let us now take a complete example. This year’s money supply went up by 8%, inflation by 5% and productivity by 2%. What can be said about this economy?
Plugging into the equation, we obtain this:
(1.08) / (1.05)(1.02) = 1.0084
The result here is that C is a little larger than 1. If it had been determined beforehand that the ideal value for C in this particular economy should be exactly 1, the result would have meant that the money supply is racing a little ahead of the system’s capacity to produce goods and services. The interpretation would be that either the economy is retooling to produce more goods and services in future periods or that it is showing signs of inefficiency. It must be watched closely to see if the current trend will continue.
Let us take another example. Here too, we assume that the ideal value of C is supposed to be 1. We are told that the money supply rose by 12.27%, inflation by 9% and productivity by 3%. What’s with this economy?
(1.1227) / (1.09)(1.03) = 1
The value of C here is exactly equal to 1 which is a good sign. However, we can still make the remark that the high rate of inflation is the result of the increase in the money supply. Luckily, there was a healthy productivity that helped to ameliorate the situation somewhat. And so, while the economy looks healthy for now, we need to see a further increase in productivity in the future or the economy will start to deteriorate. A quick measure we can take now would be to curb the money supply by physical intervention.
To have a healthy and robust economy that is even better than the previous example, we should have a slight increase in the money supply, a low rate of inflation, a strong productivity and a C that is less than the ideal value. Here is an example where the ideal value of C is again assumed to be 1.
(1.03) / (1.02)(1.04) = 0.971
But the value of C is only 0.971. This means the economy is not yet humming at full potential and has room to do better. Now, given that the other numbers look good, this economy will most certainly make further progress in the periods ahead. And this is the promise that makes it a robust economy.
Now, how do we determine an ideal value for C that suits each type of economy? We do this by taking an enormous amount of accurate measurements over a long period of time on different types of economies at different stages of their development. We put the data in the form of tables or we use it to produce what is called a family of curves.
And so, when we are handed an economy to diagnose, we look up the value of C for this type of economy in the tables or we locate the value on the curves. We compare that with the result given by the equation and we try to interpret what we see.
Would the use of this equation have predicted the crisis we are now facing? Probably not because the equation is not meant to unmask the intellectual dishonesty that went into the reporting of the economy’s condition by the government of the day.
What happened that helped to precipitate the crisis was that inflation was rising but was made to look tame. This was achieved through the use of two tricks. First, the data was cooked under the pretext that the manufactured goods were much improved over those of previous years. It was then argued that the improvements justified the rise in prices, the reason why the rise was not reported as inflation. Second, the price of gold and other commodities was suppressed to counter their tendency to rise. It worked for a while but then the prices rose.
In short, every weapon of mass deception was used by the neo con men of the day to con the people into believing they were about to enter the promised land of milk and honey and the constantly appreciating value of their home. But then the deception exploded like a Madoff scheme, and the catastrophe hit everyone like a biblical plague.
In economics as in science, the difference between something spiraling upward in a positive sense or the thing spiraling downward in a negative sense is the ability of the thing to create a surplus or a deficit. For example, the reason why we still cannot produce energy from the fusion of atoms is that in all the systems that the scientists have tested so far, more energy is spent to operate the system than the system can deliver at the output. A comparison between the input energy and the output energy has consistently shown that those systems were in deficit.
The same applies to a business as can be seen from this example: If your expenses are a million dollars a year and your earnings exceed that amount, you have a surplus, your model is sustainable and you will remain in business. But if the situation is reversed and your expenses exceed your earnings, you have a deficit and you will be out of business sooner or later.
The lesson to draw from this is that if you feel your set-up is not functioning well, you first check the bottom line to see if the model is sustainable. If the numbers show that despite the apparent troubles the set-up yields a surplus, you conclude that you have a workable model that may only need a tune-up. But if the set-up yields a chronic deficit, you must conclude that the model is not sustainable and that it should be overhauled or discarded.
Although this approach may work for a scientific set-up or a business, things become more complicated when it comes to the economic system of a country. The reality is that a country’s economy is of such size, it is divided into several sectors each of which containing many institutions, and each of those being defined by a myriad of numbers. It is nearly impossible to do a definitive testing of such a system using the standard procedure.
The way things are done in a purely capitalist system is that to some extent, the institutions experiencing a chronic deficit are allowed to go bankrupt. Thus, to determine whether or not the system as a whole can sustain itself, some people have suggested that all the institutions which are too weak to stand on their own be left to die. But this act will also bankrupt the entire country, a move that does not make sense given that the reason why we wish to determine the sustainability of the system is to save the patient before he dies. Consequently, the suggestion to let all weak institutions die must be rejected. But what is there to replace it?
Well, I wish to advance the theory that the economic system of a country can be tested to see if it will sustain itself by checking three key numbers: the money supply, the rate of inflation and productivity. And here is the equation that ties these numbers together:
M / (I x P) = C
Let me explain what this is about. I begin with the premise that a system is deemed to be stable or stagnant when the same number of workers making the same goods and services produce the same volume year after year. The system will be in chronic deficit if the workers produce less goods and services year after year; or it will be in surplus if the workers produce more goods and services. In fact, what is measured here is productivity, and this is represented by the letter P in the equation.
However, the trouble with a system as large as a country is that the demography is constantly changing, therefore the composition of the workforce is changing and so are the goods and services in demand. Thus, we cannot measure the numbers and compare them year over year with any accuracy, and we must therefore do something else. Luckily, another set of numbers can yield the desired result. These are the money supply (M) and the rate of inflation (I). Using these numbers as shown in the equation, we can determine the value of C.
From a purely aesthetic standpoint, it is tempting to wish that the C were a constant and that its value be a 1. But logic says that when human behavior is involved, nothing should be given an immutable value as an absolute constant. Thus the value of C in this equation must be considered a moving target that changes from time to time and from place to place depending on the sort of economy we have and the level of complexity that the economy has reached.
To see how the equation was constructed, we observe that there is a direct relation between the change in the money supply and the change in the rate of inflation because the two rise together and fall together. But when it comes to productivity and inflation, the relation is inverted because when one rises, the other falls and vice versa. It is easy to understand why this is so when we realize that a rising productivity makes more goods and services with less expenses which results in the reduction of prices.
Bringing these notions together, we can make the following mathematical argument: Inflation is proportional to the change in the money supply and inversely proportional to productivity. We express these words in symbols and we insert a constant to transform the proportionality into an equality. This becomes the equation which is then re-arranged and given a more elegant form such as shown above.
But before we start plugging numbers into the equation, we must put them in their proper form. Usually the numbers are given by some government agency as a percentage of the changes that take place year over year. For example inflation could be described as having risen by 5%. To plug this into the equation, we say that if last year’s prices were equal to 1, this year’s prices are equal to:
(1+ 5/100) = 1.05
And this is the number that plugs into the equation in lieu of the letter I. The same is done with productivity and with the money supply.
Let us now take a complete example. This year’s money supply went up by 8%, inflation by 5% and productivity by 2%. What can be said about this economy?
Plugging into the equation, we obtain this:
(1.08) / (1.05)(1.02) = 1.0084
The result here is that C is a little larger than 1. If it had been determined beforehand that the ideal value for C in this particular economy should be exactly 1, the result would have meant that the money supply is racing a little ahead of the system’s capacity to produce goods and services. The interpretation would be that either the economy is retooling to produce more goods and services in future periods or that it is showing signs of inefficiency. It must be watched closely to see if the current trend will continue.
Let us take another example. Here too, we assume that the ideal value of C is supposed to be 1. We are told that the money supply rose by 12.27%, inflation by 9% and productivity by 3%. What’s with this economy?
(1.1227) / (1.09)(1.03) = 1
The value of C here is exactly equal to 1 which is a good sign. However, we can still make the remark that the high rate of inflation is the result of the increase in the money supply. Luckily, there was a healthy productivity that helped to ameliorate the situation somewhat. And so, while the economy looks healthy for now, we need to see a further increase in productivity in the future or the economy will start to deteriorate. A quick measure we can take now would be to curb the money supply by physical intervention.
To have a healthy and robust economy that is even better than the previous example, we should have a slight increase in the money supply, a low rate of inflation, a strong productivity and a C that is less than the ideal value. Here is an example where the ideal value of C is again assumed to be 1.
(1.03) / (1.02)(1.04) = 0.971
But the value of C is only 0.971. This means the economy is not yet humming at full potential and has room to do better. Now, given that the other numbers look good, this economy will most certainly make further progress in the periods ahead. And this is the promise that makes it a robust economy.
Now, how do we determine an ideal value for C that suits each type of economy? We do this by taking an enormous amount of accurate measurements over a long period of time on different types of economies at different stages of their development. We put the data in the form of tables or we use it to produce what is called a family of curves.
And so, when we are handed an economy to diagnose, we look up the value of C for this type of economy in the tables or we locate the value on the curves. We compare that with the result given by the equation and we try to interpret what we see.
Would the use of this equation have predicted the crisis we are now facing? Probably not because the equation is not meant to unmask the intellectual dishonesty that went into the reporting of the economy’s condition by the government of the day.
What happened that helped to precipitate the crisis was that inflation was rising but was made to look tame. This was achieved through the use of two tricks. First, the data was cooked under the pretext that the manufactured goods were much improved over those of previous years. It was then argued that the improvements justified the rise in prices, the reason why the rise was not reported as inflation. Second, the price of gold and other commodities was suppressed to counter their tendency to rise. It worked for a while but then the prices rose.
In short, every weapon of mass deception was used by the neo con men of the day to con the people into believing they were about to enter the promised land of milk and honey and the constantly appreciating value of their home. But then the deception exploded like a Madoff scheme, and the catastrophe hit everyone like a biblical plague.
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