Regulations

Falling in Love with Love

Falling in love with love is falling for make-believe
Falling in love with love is playing the fool
Caring too much is such a juvenile fancy
Learning to trust is just for children in school

But regulation is for everyone, not just children.

There are regulations because, whether we like it or not, we can not trust everyone.  It would be wonderful if we could, but as a former president said ”Trust, but Verify”.  Ironically that same president also opposed regulation, meaning he and his group could not trust you, but you should trust him and his group.  Actually it doesn’t work that way.   An economic transaction requires a buyer, a seller, and goods to be exchanged.  Regulation is necessary for economic transactions to occur. As a convenience, so that economic transactions do not exist only in a barter system, there is typically a medium of exchange, a currency, that is traded for the goods and services being offered by the seller.

The economic transaction requires trust.  First the buyer has to trust that the goods and services offered by the seller are as they are presented. Because the buyer does not have perfect knowledge, he counts on the knowledge of others, the group, to vouch that the goods and services are as portrayed and can be trusted.  Similarly the seller has to trust that the medium of exchange is not counterfeit.  The medium of exchange in ancient times, was precious metal, especially gold and silver.  However having a scale and having  the skill to recognize that this was indeed a precious metal was not practical.  One of the earliest functions of civilizations was to MINT, that is weigh and assay precious metals, into coins, the medium of exchange.  If the exchange of some goods and service had to be regulated, then it stands to reason that there must be some goods and services that do not need to be regulated.

Unfortunately while economists study those transactions, they did not classify goods as regulated and unregulated.  The earliest classification of goods was into  a single dimension:  price.  But there is still a lot of variation even in this one dimension.  Priced goods can be expensive, inexpensive or free.  And the medium of exchange can be positive, i.e. wealth, or negative, i.e. debt.  Loans and debts are merely a way of time shifting the medium of exchange into the future.  But even within the single dimension of price, there are still shades of grey. 

Seeing things in shades of black and white is a step forward, but it is not perfect.  However rather than adding  a dimension for regulation, economists chose to subdivide price.  Goods and services are defined by economists as rival and exclusive.  Rival Goods are those that can not be used by another if you are using them.  (e.g. you and I can not both drive the same car at the same time). Rival goods are often further subdivided into durable, and non-durable depending on whether the good is intended to be consumed or continue after its use.  ( You eat an apple so it is non-durable.  A new car merely becomes used, can be driven sequentially, and thus is durable)  On the other hand there are goods that can be used by many people at exactly the same time. ( e.g. my listening to a concert does not mean that you cannot listen to that same concert at the same time).  Using this classification system, there are Private goods ( Rival and Exclusive, such as an apple) and Public Goods ( Non-rival and Non‑exclusive, such as sunshine).  In one dimensional thinking, private is thought of as priced and public is thought of as free.  However the two-dimensional system also allows for two additional classifications: Common Goods ( Non rival and Exclusive,  e.g. clean water) and Club Goods ( Rival and Non exclusive, e.g. concerts).  Buyers and sellers both agree that regulation should at least protect their interests in Private Goods and both agree that there is no regulation of Public Goods, but the buyers and sellers disagree as to how Club Goods and Common Goods should be regulated.

Buyers view Club Goods as unpriced. You should charge no price for my listening to a concert, because even if I do not buy it but merely consume it for free, that does not stop you from selling it to others.  However unless someone pays, there is no way to pay the artist who is creating that concert.  That is why one of the first laws passed by the US Congress was the copyright act to ensure that artists will produce goods.  At the same time the buyer was also protected by trademarking the goods so that the buyer could trust  the goods being sold.  But from the concert promoter’s, the seller's, perspective they are selling you admission and possibly a seat at the concert, not the music.  From the seller’s perspective, the good is the admission or the seat.  From the buyer's perspective, the good being purchased is the music, which is non-exclusive, and which might be mistaken as free.  The same problem exists for common goods.  They are not free. They are unpriced. This merely means that the transaction cost to collect a price may be greater than the value collected by that price, but that is not the same as having no value.

Regulations are an admission that the buyer may not trust the seller AND the seller may not trust the buyer, but each should be trusted by the group. In this case  the transaction can  take place.  No regulation, no trust.  Accepting regulation is not an acknowledgement that the you should not be trusted. Regulation is a means to ensure that the transaction can take place.

Mike Nichols ( the director of The Graduate) and Elaine May ( the director of The Heartbreak Kid)  used to be a comedy duo.  As such, they appeared in a series of TV commercials for Narragansett  Beer that ran during TV Red Sox games when I was a child.  YouTube does have an adaption of one that was used for JAX Beer.  https://www.youtube.com/watch?v=VkcdU4gxU38. "I'm not making fun of you. I'm making fun of her".  Regulation is not because I don’t trust you. It is because I don’t trust the other person!

E-Commerce

 

Mr. Postman

Please Mister Postman look and see 
Is there a letter oh yeah in your bag for me? 
You know it’s been so long 
Yes since I heard from this boyfriend of mine 

Is e-commerce freight, or just another postal delivery?

There has been considerable interest in the rise of e-commerce. It has prompted a discussion on whether e-commerce should be considered to be freight. It should be understood that what is called freight is only part of the transport of goods from a producer to a consumer.

Under a barter system, a producer trades goods directly with a consumer. If the producer and consumer are in the same place, there is no need to transport the goods. However in the event that the producer and the consumer are not in the same place, it might be the responsibility of the producer to carry the goods to a market where they are traded to the consumer. The movement of those goods to the market by a producer is not considered to be freight. The movement of those goods from the market under the control of the consumer is also not considered to be freight.

But if a third party, a carrier, was hired to transport the good by the producer or the consumer, it might be considered to be freight. In many cases the consumer makes a Home-Based Shopping, HBS, trip from their home to a market where goods may, or may not be, acquired. This HBS trip by the consumer is not considered to be freight, whether, or not, goods are transported. Additionally it is unlikely that goods are traded directly between a producer and a consumer. The producer will himself be a consumer, of raw material, and will only be a producer of finished goods. There may be several intermediate traders ( who are buyers from the producer and sellers to the consumer) involved before it reaches the ultimate consumer. It is this division of the supply chain into goods movement by the producer and transport within a Home-Based Shopping trip by the consumer that has led to the confusion concerning e-commerce. The movements are still the same but the handoffs and definitions of various pieces of the supply chain have changed.

If a consumer electronically contacts a producer and that producer uses a public service, e.g., the US Post Office, to transport the goods directly to the consumer’s home, there is no physical market. The market effectively becomes the consumer’s residence.

The transport of goods becomes freight when a carrier is paid to transport those goods. The movement of goods within the property of the producer is never considered to be freight but is instead considered to merely be a business transaction that is needed to produce the good. No one would consider the  transport of goods within a factory to be freight. Similarly if the producer moves a good from his own warehouse to his own factory, even if these locations are physically separated, this is typically considered to be a business transaction, not a freight movement.

If the producer or consumer has acquired a fleet of freight vehicles for other purposes, it may choose to transport the goods themselves rather than hire a carrier. The goods transported in these private vehicles, mostly trucks, are considered to be freight because if those vehicles were not available a carrier would have been used.

The reporting of information about freight will also be different depending on whether the information is obtained from the shipper/receiver, or the carrier(s). A producer may know the contents of a sealed container or a small package and may view the container or package as not relevant in their choice of carrier. However from the carrier’s perspective, they may not know or care about the contents of a container or package, and classify the goods by the package itself, e.g. Freight All Kind, rather than the contents.  Similarly a carrier may only know part of the supply chain, e.g. where his service is needed,  a warehouse, intermodal rail terminal, seaport, or airport, where goods are loaded and/or unloaded, not where they are produced and/or consumed. A shipper and/or receiver may be ignorant of these intermediate carrier stops. A shipper and/or receiver may distinguish individual shipments, but the carrier may consolidate shipments and the operation of their vehicles, not the operation of the shipments, might be optimized

Shown in the figure below is an example of a current supply chain with classifications as freight. That same figure shows the same movement reclassified as e-commerce. However in both instances the amount of goods movement is exactly the same. Whether the vehicles transporting those goods use more resources depend on whether the delivery is using existing resources ( e.g. US Postal delivery) or are using new trucks and the operation of those trucks requires more resources than the HBS trips they are replacing. E-commerce may be growing, but it may be merely reclassifying goods movement from non-freight or personal trips to freight. In other words, just because e-commerce is growing that doesn’t mean that freight is growing.

The reporting of freight and e-commerce data is highly dependent on the source of the data and the operations involved.  In the figure above, if the information is from the perspective of the shipper ( e.g. The Commodity Flow Survey, the Freight Analysis Framework, etc.), the carrier transfer point may not be identified; but if a carrier centric source had been used (e.g. Transearch, Carload Waybill, etc.) that carrier transfer location may be identified.  The first freight trip between the Producer and the Trader and the second freight trip between the Trader and the Retail Warehouse may not be linked.  If in-store pickup is used with e-commerce, no change from the current condition with an HBS trip may be expected. Otherwise e-commerce may replace the HBS trip.  If the e-commerce is directly with the producer, this e-commerce might be identified as an on-line direct-to-consumer purchase. If                    e-commerce is used it may only be a change in the warehouse, or might be directly from a trader. 

Reality

 

Imagination

There is no life I know
To compare with pure imagination
Living there, you'll be free
If you truly wish to be

Imagination is great, but sometimes you want reality!

Return with me now to my Sophomore Engineering class when I was taught  Electrical Engineering. In the unit on Alternating Current, where Alternating Current is a regular repeating trigonometric function of current ( a sine or a cosine), the output had a real AND an imaginary component. The engineers-to-be were being taught to discard the imaginary part. I never could wrap my head around that, ran away metaphorically screaming, and became a Transportation Engineer and NOT an Electrical Engineer.

The problem might have been that been that the output solutions should have been hyperbolic trigonometric solutions all along, which repeat only in imaginary planes. It the inputs are real then the outputs remain only in the real plane. (I.e. Real inputs have only real outputs). The imaginary solutions cancel each other and there are only real solutions anyway.

I.e. Given cosh(x) = cos(x)+j*sin (x) where j is the imaginary number, √-1,then any solution which is expressed as a combination of  imaginary numbers and real numbers can be expressed as a only a function of real numbers. So more than fifty years later I realize that I should not have run away screaming, I should have realized that what was being taught to me as imaginary was not only real, it was hyperbolic!

Global Trade

 

Nothing Lasts Forever

Nothing lasts forever, you should know that by now
Good times, heartache
You'll get through this trouble though you may not know how
Your heart won't break

International Trade may be growing now, but that growth won't last forever

Growth follows a sigmoid, S, curve, whether it is the growth of animals from birth to full adult size, the total population of an island, etc.  A simple sigmoid curve is the hyperbolic tangent function, tanh. If you know the period over which the trade is going from no trade to full trade, and you know the value of full trade, then it is possible to make predictions about the value of international trade.  Based on fitting simple linear approximation to the observations, it looks as if the growth of trade is happening over 100 years, from 1974 to 2074, and that the first 25 years will show modest growth, the next 50 years will show the highest growth, and the last 25 years will be a return to the previous modest growth before full trade is achieved.  It is going from virtually no trade in 1974 to $45 trillion in 2074.  The annual trade may be more or less than the amount forecast, but it would be even more wrong to think that the current growth rate will continue indefinitely.

Discount Rate

 

The Entertainer

I am the entertainer
The idol of my age
I make all kinds of money
When I go on the stage
Ah, you've seen me in the papers
I've been in the magazines
But if I go cold I won't get sold
I'll get put in the back in the discount rack
Like another can of beans

What should be the rate in that discount rack?

If the universe is hyperbolic, perhaps the discount rate, how much the future is worth compared to the present, is a fundamental constant of that universe.  The odds of a choice, which is defined as1where 0 is not making that choice, is 0.5.  That means that at its median, 50% will have made the choice and 50% will not have made the choice.  Let’s call 0.5 the range, s, of the choice.  Then the square root of the variance according to a normal logistics distribution of choice is 0.5*√3/π.  This number is 0.9067, or “A bird in the hand is worth 1.1027 (its inverse) in the bush.”  This means that the discount rate is 1/.9069 -100% or 10.27%.  If the interest rate is less than 10.27%, the universe is telling you that the cost of investing, on average, will have a positive rate of return. If interest rate is greater than 10.27% then the universe is telling you that the cost of investing, on average, will have a negative rate of return.

This might explain why humans as a group get nervous when the interest rate of a loan is much higher than 10%  It is only when the repayment is in future inflated dollars that higher interest rates may be tolerable. This discount rate also assumes that the asset being acquired is fully productive during its life and it is not depreciating. If it is depreciating, then that should be subtracted from the discount rate.  However, if an asset can be sold for 5% of its present value after 20 years and produces full value over  those 20 years, it is only depreciating by 0.25% per year.

Quantum Entanglement

 

Spooky

In the cool of the evening
When everything is getting kinda groovy
I call you up and ask you
Would you like to go with me and see a movie
At first you say no you've got some plans for tonight
And then you stop and say, "alright"
Love is kinda crazy with a spooky little girl like you

Maybe it isn’t so spooky after all?

Given the Heisenberg uncertainty principle, and the superposition of particles, isn’t quantum action at a distance inevitable, not spooky.

For example, take a deck of cards.  Divide them into one deck of red cards and one deck of black cards.  Turn the two decks over and shuffle them so that you can’t tell which deck is which.  Pick two cards from one deck but do not look at them.  You do not yet know the color of the card. Now look at the first card.  If it is red then that means that every card in its deck was red.  Now if you look at the second card, it is ….surprise, surprise…. red.  There was no need for communication between the first and second card. Any distance separating the cards is irrelevant. By observing the first card, which had not yet been observed, you could be certain of the color of the second card.  This isn’t spooky, it’s statistics.

Schrodinger’s cat, before it is observed, has odds of being 50% alive or 50% dead.  But the unobserved odds have nothing to do with the cat.  The cat will be either 100% alive or 100% dead but you will not know until you open the box, observe it.  The odds are NOT the result.  The odds of a coin flip are 50% heads.  But the result of every coin flip will be either 100% heads or 100% tails. There is nothing spooky about that.

Inflation VIII

 

Catch The Wind

For me to love you now
Would be the sweetest thing
That would make me sing
Ah, but I may as well, try and catch the wind

Raising the Prime Interest rate to control inflation may be trying to catch the wind

In being asked to control inflation by raising its interbank interest rates, the Federal Reserve Bank is using its primary function, to serve as the lender of last resort for private banks, in order to try to control random events. In doing so, it may doing more harm than good. The interest rate hikes may have contributed to private bank failures, and preventing bank failures is precisely why the Federal Reserve was created in the first place.

Banks exist to take existing liquid value and convert it to long term less liquid future streams of value. When that value, a currency/medium of exchange, is based on a commodity there is a problem. Using a commodity as the medium of exchange in economic transactions means that you have to store, safely maintain, and transport that commodity. When that commodity is gold, this is not a trivial issue. Gold is heavy. Banks started issuing notes that represented a certain amount of that commodity. But that imposed a burden of trust on parties when using those bank notes. Both the buyers and sellers in economic transactions have to trust the bank and the value represented by its note.

When a currency, the medium of exchange, is a commodity that crates problems when groups hoard that commodity, corner the market. Then only economic transactions by those parties can be accommodated, which is precisely the opposite of the purpose of a medium of exchange. Trading by barter requires that both parties want what the other has and value their goods the same way. Since you can’t always find such parties, medium of exchanges were used to measure the value of goods. When the medium of exchange is a commodity, like gold, it is a commodity currency, and as mentioned when groups hoard that commodity and will not participate in exchanges, then the number of economic transactions declines. That is why fiat currencies were developed that are not finite and the market can not be cornered. The fiat currency should be sufficient to allow economic transactions to take place, including any increases in value, and you have to trust that the party issuing that fiat currency. If they set it to an amount that is more than the economic transactions it must support,  such as with the Weimar Republic, hyperinflation can result. That is why national economies usually set their currency to the value of their economy, e.g. M2. If that was the only economic transactions that needed to be considered, then that should suffice. The problem trade between nations with their own currencies.

During World War II, it was realized that gold as the international trading medium of exchange,  could not accommodate international trade because almost all of the world’s gold was in the Untied States and an international fiat currency did not exist. During Bretton Woods, John Maynard Keynes proposed the creation of Bancor as the international fiat trading currency. The problem was there was as yet no trusted group to issue such a fiat currency. John Foster Dulles and the United States prevailed in an argument that the US Dollar, while a fiat currency domestically, would be convertible into gold for international trade, a commodity currency.

This dual status of the US Dollar, a fiat currency domestically and a commodity currency internationally, was maintained until the Nixon Shock of 1971. At that time, the US Dollar was became a fiat currency at home AND in international trade. However the dollars in circulation were only created to support the value of the US domestic economy, M2. There was no recognition of the value in international trade that was supported by the US Dollar. As domestic  US Dollars competed with international US Dollars, the result was inevitable as the high inflation of the late 20^th Century. Arguably the fiat value of  the US Dollar should be M2 + the USD used in international trading, MI. International trading has been increasing by 6-8 percent per year and the USD used in international trade, which according to the Society for Worldwide Interbank Financial Telecommunications, SWIFT, is approximately 50% of that trade. Thus the fiat value represented by the USD should be the current USD plus the change in M2 plus 50% of the change in MI. Measuring inflation over the last year includes changes in product inflation AND changes in currency inflation over the last year. While Year Over Year inflation has been declining and has been  as recently as 2020 been about 2%, long term inflation in  the CPI since 1971 has been about 4% per year. The pervasive inflation is because in those periods where random product inflation is zero or negative, there still has been an increase in currency inflation.

Arguably the Federal Reserve should only be concerned with currency inflation. However by setting the US Dollar only to accommodate the changes in M2, this ignores any changes in MI. It is proposed that the money supply of the US Dollar should recognize its use in MI. In this case, currency, medium of exchange, inflation should be zero. The problem is that inflation also includes product inflation. The Federal Reserve Bank tries to address product inflation by changing its Prime Inter-Bank Interest rate. In all honesty it can not do this. At best it can time-shift supply and demand, but it can not create or remove this supply or demand. The problem is that banks turn existing liquid value into illiquid future values. Withdrawals, if any, are from liquid reserves. If the withdrawals exceed the liquid reserves, then long term illiquid assets may be sold at a loss to turn them into liquid assets. If there are no buyers, or the loss is too great, then the bank fails.

A billionaire investor, e.g. Peter Thiel, withdraws his deposits/value from a bank, e.g. Silicon Valley Bank. While the bank has already converted his liquid value into streams of illiquid future values of a greater amount. However when each investor withdraws, that investor is allowed to withdraw liquid assets from the bank's reserves rather than receiving the converted illiquid value. The result may be a bank failure. The action precipitating the withdrawal may have been reduction of the future value of the stream of illiquid value because of the raising of interest rates. By continuing the fiction that the deposits have not already been converted and allowing them to be withdrawn from liquid reserves, the very act of raising the interest rates may have precipitated the bank failure that the Federal Reserve was created to prevent. You can change the impact of numerous random events. i.e. climate, setting the house odds. You can not control every random event, i.e. weather, each roll of the dice. Trying to do so is as futile as trying to catch the wind.