04 December 2014

Prometheus Unbound [update]

The mainstream pundits, and the blogosphere too, continue to be perplexed by the refusal of open market interest rates to rise as they had hoped/wished/needed. So, it falls to moi to yet again 'splain some more.

The notion of moolah as commodity rests on the base assumption of trade in real goods: that supply and demand are functionally infinite, and that the "curves" result from individuals' (and remember, corps are people too) levels of psychic satisfaction. To put it yet another way: real demand requires only that "I" want another widget and have the moolah to pay "more" for that widget. The only limit is my satiation with said widget. On the other side, supply, Widget Corp. is willing to make widgets until Hell freezes over if enough folks want them. Availability of production inputs are assumed to be infinite in the sense that a source of supply always exists, at some price.

Now, when it comes to investment, the situation gets a bit gnarly. The MBA types, and most quants, don't distinguish between fiduciary capital and real capital. Most, likely, don't even acknowledge that the latter even matters. But, of course, it does and explains what's going on now. Financial engineering isn't real engineering; not by a long shot.

If we view moolah as an investment commodity, then the gnarl sets in. On the supply side we have retained earnings by business and non-consumption by the rest. On the demand side we have business. What's the motivation by business to take fiduciary capital (moolah, to you and me) and turn it into physical capital? One thing only (in a rational world, of course): that the plant and equipment so made will yield more profit than by not doing so. Nothing else. Financial engineering, so beloved by Wall Street and The City, doesn't count.

Note, however, the difference in the demand function betwixt consumer demand and capital demand: the consumer just wants a better hard on, but the CxO demands that the capital produce returns **not otherwise attainable**. The CxO, if s/he's rational, isn't maximizing some satisfaction function, but some very specific engineering breakthrough. In order to get that return the CxO has to know, or have a high probability, that the new plant and equipment are better than what s/he's got now.

Said plant and equipment may be something entirely new, such as a Swiss screw machine around 1870, or it could be off-the-shelf items not yet adopted by a business. Either way, unless such plant and equipment actually exist, there is no demand for the fiduciary capital. It will just sit around as retained earnings or used to buy back shares or buy bling for the CxO class. Since the MBA and quant class remain stuck in a 19th century mindset (Right Wingnuts all), they can't see that the arc of technology and resource availability has turned, at best, flat. If one considers the widgets we use today, how many implement a semantic that didn't exist before say, WWII? I'll bet a nickel that the number is 0. Capital has spent the last few decades in ever decreasing incrementalism. Ponder that for a moment. Near zero interest has not a thing to do with Big Gummints, but an utter void in the heads of the CxO class to find new, and useful, ways to turn moolah into machines.

This is the base reason so much fiduciary capital has been thrown at non-productive uses such as residential real estate. The Masters of the World are intellectually adrift. And we, as a species, know just about all there is to know about physical reality. Hell, we've found the God Particle. Once you've reached the edge of the World, there's no frontier to explore.

Sometimes ya just shouldn'ta oughta got out of bed. Left the punchline in the briar patch. So, here it is.

Widget Corp. can go buy more land, labour, and physical capital if it has the moolah. What it can't buy is any new Law of Nature (or God, depending on your -ism) or the brains to find it. Those two either exist, or they don't. These days, the chances that there remain any of the former get nearer and nearer to 0 and thus the chances to buy the latter (I wonder, would paying Newton or Einstein more moolah made any difference?) do too.

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