munky.org|v3.0

Getting the economy to a well tuned machine...

The system is broken. Obviously it has been broken for a long, long time, sustained by a series of patches and hotfixes throughout the years. The Great Depression, The Great Recession, and all the recessions in between. The good news is we are not the only one suffering. Free and centrally planned markets have always proven that they are no match when pitted against the true sources of the market’s force, the consumers and the investors (and other elements as well). Sometimes people want to buy stuff, and everyone always wants to make more money.

Recessions are not all that bad though. You can always learn more from failure than success. That’s if we take away lessons learned.

Before we can learn things, we need to figure out what went wrong, bad enough to shake every market in the world. Yes every market, because even the great survivors are getting hit now with inflation and bubble fears of their own. No economy is immune.

So let’s first think about the market’s in the terms set out in “A Beautiful Mind,” a wonderful movie by Ron Howard about John Forbes Nash Jr., the author of the “Nash Equilibrium.” There are 6 guys, one smoking hot babe, and her 5 average friends.

• Centrally planned (the former Soviet Union) – The government matches 5 guys to the 5 average girls, arrests guy number 6 and takes the hot one for themselves.
• Limited centrally planned (China) – The government gives each guy a choice of one of two girls, but the one who gets the hot one gets arrested and the government takes her too
• Free Market (theory) – Best interest for the guys to decide which girl they should take, with the hottest girl going to the hottest guy. Other way around, the girls choose their man in a similar fashion. Men (investors) make rational decisions.
• Free Market (reality) – A couple of guys decide to choice average girls, the other all fight for the hottest. The losers spend a lot of money and time wooing the remaining girls.

There you have it in a nutshell.

But to further expand on this idea, let’s change this to engineering ideas.

• Centrally planned economies think of themselves as Swiss watch makers, know for precision devices.
• Reality is that the pieces don’t quite fit, so these economies either fail or allow for more error in their thinking. Modern China probably has the lead on this technique
• Free market economies relate more to a set of different shaped children’s blocks. Each shape fits only in its whole, and the markets forces everyone to come out correct
• In reality, sometimes the circle makes it through the square hole. If the government realizes this enough they regulate. If they don’t, eventually the entire system fails

Theory to realilty always sucks for economists, because their models are still far too concrete to comprehend in subjectiveness of the forces. Prices set by supply and demand, determined by investors who make rational decisions with their money. More like supply, demand, fear, greed, speculation, etc. Rational thinking is far too subjective for 1′s and 0′s.

But what can we do? Any good enigneer knows that any system that is to operate is designed must work within constraints. They also realize that these systems will be different in real life than in design. Tolerances, deformation due to stresses, vibrations, thermal expansions, etc. etc. etc. A lot can be accounted for, but at some point assumptions will still need to be made. And this is with a far more exacting science than that of economics. But the idea still remains.

I am still a firm believer in a free market system, but to operate closer to its model, it should be constrained. This is not to be confused with regulated. Constrained. While all of the variables to be constrained and hwo to set those constraints are outside the scope of this post (and well outside the amount of time I am willing to put into this for FREE!), some are fairly easy to see.

• Oil futures
  • At one time these prices were regulated. We enjoyed fairly consistent gas prices, and quite often benefitted from local price wars amongst gas stations. I still remember getting gas in the 60-70 cent range, and this was the late 90′s, early 2000′s. Nowadays, this market is unregulated, and extremely volatile. Although it should be considered that consumption is much higher than it was then (with the emerging Chinese middle class and their 60 mile traffic jammed highways), that can’t explain everything. Once again, supply, demand, fear, greed, speculation, etc. A better solution than strict regulation would be a constraint, possibly similar to the current constraint on the yuan (it can only move so much a day against the dollar, and only to a threshold). Allow it to be constrained to within a certain percentage, tied to some measure (or measures) of the economy.
• Food commodities
  • A similar constraint as with gas prices. Part of the cost of food commodities is transportation cost. Properly constraining could also potentially include a government subsidy, driven off of the constraint.
• Interest rates
  • Need I say more

A properly constrained free market economy can - even with pieces being imperfect - allow it to operate more as an expensive swiss watch than a can of blocks. The secret is in using the constraints to allow the pieces of the economy to fit each other in an orderly fashion when looked at from a macroeconomic viewpoint.

Maybe I might spend some more time developing this idea. I might not be a schizophrenic genius, but you don’t always have to be

It never hurts to add up your own numbers

It’s a good question. A couple of jobs back, I had an 401k account. They didn’t match, but they put 3% of my salary into my 401k, regardless of what I put in. So I put in 3%. As the times were good, I watched it grow. It was a measly amount, maybe $3500 at its best time. Gains were totaled in the 20% range, even after 2-3 years of not working for them anymore (no more in).

Then times weren’t so good. I dragged my feet on opening up an IRA and rolling it over, and it cost me. By the time I rolled it over, the account was worth slightly south of $2100. $1,400 hit. And these were invested into very good funds. I had a slight amount in a very aggressive fund, some in a more moderate fund, then 40% in bond and money market funds. I did the safe path, just like they tell you to do.

When I opened up my IRA, I had already gained some experience with the markets before hand. I decided to take “the risk” of using some money, particularly from overtime to start with, and buy some stock. But what to buy?! There are soooooooo many options out there, and even with screeners, you can find hundreds that fit your criteria. So I went with what I knew, and in some ways trusted my gut. (more…)

This Chinese trawler was trying to snag the Impeccable's acoustic array

So the Chinese are up to cheap tricks in international waters. The USNS Impeccable was harassed Sunday in the South China Sea by multiple Chinese boats (read full story on CNN here or on Al Jazeera English Edition here). The ship was in international waters, yet one of the vessels radioed in and ”called her operations illegal and directed Impeccable to leave the area or ‘suffer the consequences’.”

 

The US ship’s commander asked the Chinese ships by radio “in a friendly manner” for a safe path to leave the area.

Two Chinese boats then moved directly in front of the USNS Impeccable, forcing it to take emergency action to avoid collision (Al Jazeera)

 

This is disturbing. First off, the ship is generally unarmed, with most of its crew being civilians. The other Chinese vessels also attempted to snag off the underwater acoustic equipment that is the purpose of the ship.

Given the Chinese government’s history of harassing naval ships, and of closing its ports to Navy vessels (and detaining for 11 days the 24 American crew members who had a mid-air collision and crash landed in China), I think our government needs to take some steps. Obviously, in some parts of the Chinese government, diplomacy doesn’t work. The Navy should attach Marines to any vessels that are to be in the sea near China. The original purpose of the Marines were to be on ships and fight of attackers (I.E. Pirates and the British). They are the only true amphibious fighting force in the military. And I promise you any Chinese intelligence boat, trawler, etc. that decides it wants to try to harass an American vessel without regard will think twice after being boarded by a handful of Marines.

Just my thoughts. It is concerning though. The Chinese have been smuggling classified parts out of America for years, probably to reverse engineer them and build up its own military prowess. The plan is simple yet very powerful. Faithful Chinese move to America to work, educated, etc. Although they have not been given any direct orders by the government to steal information, they know they will receive payment for anything they get. Eventually they make contacts, and hopefully manage to leave the country with something good.

A few years back a respectable Chinese man made the wrong contact. It turned out his contact was a UC FBI agent playing a dissident American with access to an F-15 engine. Although I don’t remember the specifics, they had made an arrangement for him to purpose the engine for millions of dollars. Although he was a respectable business man, he wasn’t a millionaire. Where did the money come from? China denies all involvement, obviously.

Of course even bigger threats emerge without the need for millions of dollars and sleeper spies. In February is was announced that the plans for the Marine One helicopter were compromised. Not by a high-tech hacker but via P2P file-sharing software. Absolutely absurd that some idiot with a computer that has sensitive data on it could install file-sharing software! You would think somebody would think “hey, why don’t we put a block on all P2P clients?” Nope. Real geniuses, and these guys get paid the big bucks. The lucky recipient of the plans? Tehran. Yup, one of the biggest enemies to the western world (and Israel), who has been developing nuclear technology while our bastard politicians have been trying to play diplomatic. These guys have the plans for the upgraded presidential helicopter. Genius.

We walk a tight line in this country. Although America is supposed to be a melting pot of cultures, we also have doors open to cultures and individuals whose only intent is to destroy us or steal from us. We could lock the borders tight, but to think of it, that would be truely un-American. What do we do? I don’t have all those answers.