January 22, 2008

Economics, Definitively Explained

I know there's a lot of confusion out there right now about the American economy. Has it reached its bottom, as measured by the stock market indices? (No.) Will the U.S. economy collapse? (No.) Shall I compare thee to a summer's day? (Not in January.)

I base my analysis not on the smug explanations of a bunch of guys wearing pastel ties on the business cable channels, as so many people do, but on the work of the British astronomer Sir Arthur Eddington, circa 1927. To wit, Sir Arthur gave us the elucidating phrase "time's arrow" to describe that curious temporal asymmetry in macroscopic phenomena that can only be explained by means of statistical probability. Time's arrow, in any complex system, tends always towards greater entropy, which we call the future, subject to the fluctuation theorem, which holds "after the discovery of statistical mechanics physicists realized that the second law [of thermodynamics] is only a statistical one, so that there should always be some nonzero probability that the entropy of an isolated system will spontaneously decrease; the fluctuation theorem precisely quantifies this probability."

Look, I'm not going to take a lot of time to explain why these ideas, as applied to the American economy, clear everything up. You're either with me to this point or you're not; however, the resistance to entropic anomalies implied by massive and complicated phenomena (like a big economy) certainly teaches us that the egg is not going to reassemble itself on the floor and leap up onto the counter from which it recently rolled. Agreed? Of course. By the same token, Chicken Little guys like Jim Kunstler, with his collapse ideas and sudden reversion of America to the Stone Age, proceed at their own peril and in defiance of clear and settled laws of physics. I mean, geez...the idea I actually have to spell this out. Sometimes for fun I read their stuff, but it's just for the colorful language. If the reassembling of the American economy has a statistical probability approaching (but not reaching) zero, by a parity of reasoning a sudden acceleration in entropy in defiance of the system's inertia and tendency toward modulated and highly interdependent processes is also (although not as) unlikely, providing the limiting criteria are held constant over the period in question (availability of resources, productivity, steady-state workforce, etc.). Again, I realize I'm being obvious, but these points are important.

I believe in rigor and in the laws of thermodynamics, wherever they may lead me. So let me tell you where the bottom of the Dow Jones Averages will be (other prognosticators shy away from such predictions; not me, I relish the opportunity to be precise). The Dow will move to 9,100, or a drop of about another 20% from its high of approx. 14,000. I know you know how I got there, but for the sake of those new to the class, look: the American economy = 70% consumer spending. The source of the money for spending was, during the period about 2001-2006 the sum of x (employment earnings) + y (MEW, or mortgage equity withdrawals); thus, x + y = .7(G), where G = gross domestic product. (Why do I have to crunch these equations all by myself while the guys making $500,000 per year on CNBC get by with all this blather about "market exuberance" and its opposite number?) During this period x ='ed y, approximately; thus, simplifying, 2x = .7(G). .3(G) came from somewhere else (Bill Gates's money market account interest, probably). 2x/2= x, (reflecting the fizzling out of MEW, or y), thus leaving only .35(G) as the contribution of consumer spending to GDP, or a reduction of 35%.

14,000 x .35% = 4,900. Subtracting this number from 14,000 = 9,100.

There will be another kegger in the quad Friday at noon. Please liquidate your Schwab accounts and plan to be there.

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