Monday, June 21, 2010

Newton Rules!

The inflation vs deflation debate rages unabated. Inflation skeptics buy bonds (even zeros!) whilst inflation bulls pile into gold, art and, for example, rare anythings. Austrians prescribe global vomit, whilst Keynsians seemingly prefer more of the same. If anything, the camps are becoming more polarised, with the World's Best PMs launching gold and gold-class shares, at the same time as the Europeans get a headstart on the US Feds and thheir States on long-neglected austerity, while JGBs gravitate anew towards 1%. Hmmm. Are we at that moment where Dr. House blithely prescribes steroidal treatment (after the requisite spinal tap, of course), only to reverse course when he sees the patient crash resulting from the prescribed meds? I think so - for it seems that whichever side of the inflationary-deflationary ridgeline we slip down (or are pushed towards by markets, policymakers, tea-party-ers or teutonic teatotallers), the results are unsatisfactory from the viewpoint of the patient, which will cause our metaphorical Dr House, to try yet another course of action.

IF this analogy is true, might we liken our situation to anything more real in the world around us - something more than a dramatic TV series (however popular) - something we might relate to more easily? The answer is yes, there are some splendid examples.

First and foremost, we can look to the Carny. Recall (at least those of my vintage) the infamous "Salt-n-Pepper Shaker". One needed a strong constitution, lots of peer pressure (or both) to ride this, defined by gravity and counterbalance. Like the prevailing financial and political systems, it is a devilish creation bordering on the absurd. Yet patrons willingly queued up for the "pleasure", thrill, or mere experience. Note that the motors and hydraulics that allow one to temporarily defy the natural state of entropy are impressive, and requiring the generation of some serious force and inertia to turn the complete loop, though ultimately gravity rules irrespective or uneventfully smooth operation or mid-stunt morbid mechanical failure.

For the musicians out there one need only to look atop their piano, or inside their violin case to the lovely archetypical metronome. It too provides a reasonable approximation to the predictable timing of both policies and, in turn, markets back-and-forth movements, despite the former's apparent Brownian attributes in the shorter-term. Like policy, with its weight, and forces that set in motion, both the musician and the practiced observer can see the limits of such forces and their movement through space, caused by the primary large static weight's pull upon the smaller adjustable weight, which will, eventually, in rhythmic fashion return the undulating staff to its rightful place.

However, the metronome is but a simple form of pendulum: a reasonable, though perhaps insufficient abstraction. More apt, might be the mesmerizing Newtonian Pendulum (more technically known as "An Executive Desk-Toy") popularized in the 1960s for errrr ummm obvious reasons. Here we see the interplay between momentum, and kinetic energy within a reasonably simple mechanical system of man's construct. We can tangibly witness the transference of energy, and its eventual dissipation through the device's inability to conserve it. No, it is not perfect. It is on but a single plane, but it remains a good likeness of the transference mechanisms of financial markets and resulting political phenomena unfolding before us.

There is also, of course, the classic See-Saw (though the pictured one here is rather more elaborate than those of our youth and present-day playgrounds. It is worth mentioning if only because the eventual outcome path, while ruled by gravity, is heavily influenced by the relative mass of its human counterweights and their forces thus applied (and counter-applied). As a result, the relevance here is of the caveat that is my mantra: "shit happens", and as such, riders do from time-to-time end up in the emergency room, an outcome of which the public, and policymakers should remain cognizant.

But the best analogy is perhaps the lead or sand-weighted Punching Dummy. Humanity, in general, their households, and their sovereign and corporate institutions alike will undoubtedly take hits - many hits, and from all sides - but life will go on, and as in post-war Europe, Lebanon, Argentina, Turkey, Serbia, and other seemingly unimaginable examples to our unpracticed imaginations, it will rebound and rise again, in fits, starts, almost randomly lurching to' and fro', before balancing upright again - if only to have the collective shit kicked out of it yet another time...


RichL said...

Where you stand is where you sit. If you are moving the pendulum, or have the sense to move with it, all is OK.
However, if you are UNDER the pendulum, per the Edgar Allen Poe story of The Pit and the Pendulum, it's considerably less pleasant.

As a market participant I can (sometimes)adjust to where the pendulum moves. As a citizen, the pendulum seems to be of the Poe variety; lower, inexorably lower...

Anonymous said...

Ha! Cassandra is a burner? 1999,2000,2003 - a wonderful time each year.