Sunday, May 17, 2020

The Unescapable Logic

Let's take a look at why The Shape of Things to Come was correct as a prediction (and please remember this analysis was done at a time when there was fierce speculation even among experts that were in no way as accurate as the post).

The first principle is that the economy is a system that is always quasi-stable near some equilibrium point. Economic expansion means that excess goods are produced along with the chits to redeem  them by people who somehow are considered to have merited the chits. An economic contraction means that the causal relations for incentivizing the goods production and chit distribution squirrel cage has broken down. If this goes on long enough, the consumption necessary to sustain relative prosperity overtakes the production and a cycle of poverty can set in.

In the first round of lockdowns, we as a group decided to forego prosperity for the imaginary chits of safety. Consumption went along, but not at much of a pace that it would jeopardize the imaginary value of the chits (money given out by a government with a large printing press). What did happen, however, was that the squirrel cage of work and value was put askew. Disproportionately, the service sector was nullified and the chits standing in for the value of an education were devalued. This might go on for a bit and perhaps nothing would be the worse since much of US education is a worthless waste of time, anyhow. But, there is a but ...

What if that adjustment to the running of the squirrel cage caused enough people to decide that the education was not worth the effort? There will always be some. But what if this small trickle became a gusher? Would there be a corrective mechanism within the system to put it back in line? For STEM degrees from first tier universities, of course. But not necessarily for the rest, most of whom incidentally seek to redeem those chits in the recently nullified service sector. That amplifying confluence of forces may have an effect outside its initial expectations.

Those chits rely on the belief that they can be redeemed later in life. When that belief is broken, an alternate valuation must be adopted. The problem with university educations are that they are largely inherently worthless and already many of the students, if not the majority, understand this. Why pay for it if it is not necessary?

If enough excess value is drained by the system through consumption, we will reach a point where subsidies must be prioritized. The student loan system stands out as one where $1.4T of debt is probably too much to write off. We cannot pay students not to pay their loans even if those loans are ultimately back to the government. So some proportion of that debt will be reexamined by the students and if found worthless, a wave of defaults will occur so much so that our economic system will be forced to reconfigure the education system.

I doubt that the "new normal" can survive when children and college students are sent back to class. And when that happens, the pandemic will appear to be something of a fraud regardless the spike in elderly deaths. A reevaluation of assumptions will be the zeitgeist.

The second principle is that unexpected changes to the equilibrium have unexpected consequences, and the most difficult to predict are inflections in human value systems. For example, we once valued books not only for their information but as symbols of learning. Take a look next time you are visiting with an "educated" friend or even a professor. Where are the books? Not so much as once were common.

It is not just that so-called educated people don't own books, they do not read books or consider them important. This is especially common among today's students. Consider this as a precursor. The question is, "What does knowledge have to do with my success?" It's fine to say that this is nonsense, but is it?

These are the absurdities that appear just before major societal corrections. We once thought that family was critical to success. No so much anymore. Pedigree is not destiny.

There has been a slow but steady trend to devalue actual education. This may be the jolt to upset the institutional apple cart. If so, I doubt it was expected that 50% of $1.4T could head towards default in a catastrophe. But I do not see what there is to stop it either. Eventually, all such absurdities are eradicated from a functioning system as it changes modes.

The alternative view is that the value of the "education" is simply as a credential to gain employment in the government or corporate sector--that the value is in being socialized for the purposes of the government/corporate interests and not so much for knowledge. If we consider that corporations and government aligns with a feeling-type personality, then college is simply a feedback loop of resources for the indoctrination of the future corporate fodder.  Is this a cynical approach? Yes, but maybe just so. College education in the US is a paradox of absurdities with one constant--socialization.

If so, then systematic default in student loans would gladly be borne by the government without any reconfiguration of the "educational" enterprise. Failure will be subsidized if political conformity is achieved. In that sense, it it not failure per se.

Let's see.

Sunday, April 05, 2020

The Shape of Things to Come

Some things are fairly well known. Let's start from those.

1. In the US, for the week of April 15, the average daily death toll will be a couple thousand coming mainly from the Northeast corridor.

2. Beginning in the week of April 21, if lockdowns persist, the unemployment rate will raise to over 15% and moderate size non-service oriented businesses will begin layoffs.

3. In the week of April 28, if the lockdown persists, the central government will no longer have enough credit to float the system, and businesses will follow their own pattern of adaptation.

Which means that within the next week, (the week of April 15), the central governments around the EU and North America have a decision to make:

A. Admit that the pandemic is out of control and instead prioritize the economy.

B. Double down into economic catastrophe.

My guess is that the governments will choose A. In that case, we have a very interesting social condition that will develop in that the free peoples will be divided amongst themselves on the basis of age. Going into the 2020 election, we will see that develop in political terms as well. I would expect that the Democrats will demagogue the issues and attempt to have it both ways before strongly siding with socialist-type interventions that are not economically feasible. The Republican, lacking strong leadership, will dance in the wind as they hope for the situation to resolve itself.

So by mid-May, we will have a new normal. The economy will be reopened but the virus will not be defeated. The daily death toll will remain in the thousands, but most people will begin to adapt to the threat, having learned effectively nothing. With a depressed economy and no excess capital to spend, certain changes will need to be made:

1. Higher education will cease to be a four-year vacation for the indolent on loans. The student loan system collapses under the weight of unpayable loans built on fraudulent education, bloated administrations, and a squirrel cage system of raising costs without value.

2. The financial system will be sacked of a great proportion of its liquidity.

3. The service sector will remain contracted, not for the virus, but because there is no money to spend.

4. Capital investments will contract and political solutions will be proposed that are in fact confiscations of wealth.

5. The legal system will lose legitimacy to the degree that court orders are not enforced by fiat, but rather only through negotiation.

Well, let's see.

Wednesday, March 11, 2020

Modeling the Coronavirus Contagion

Without a vaccine, the protection to at-risk populations is a matter of not getting the disease in the first place. So, the question of the pervasiveness of the spread of the disease is of greatest importance. The answer to this question depends almost entirely on the immunity of those infected and recovered since the US is not able to institute draconian isolation measures over any large geographical area.

While there was an initial indication that recovered individuals may be contagious, this is likely a test failure. Let us therefore assume that recovered individuals have immunity from reinfection and are not contagious for at least six months. If so, then the protection of at-risk individuals is feasible if they can be locally isolated when the wave of infections sweeps through an area. The recent success of the Chinese to stem the rate of spread of the disease should give us hope even though we do not weld doors shut on apartment complexes.

Remember, there is an approximately two-week lag time. So, when you see a bump up in the local rate of infection, act quickly and decisively to isolate your at-risk populations. Be prepared for 6-8 weeks of isolation per wave of infection. Meanwhile, on the national level, the best policy is to isolate the nation and quickly saturate with testing and isolate any affected occurrences. This disease is not super-human, but it is no slacker either.

A more detailed nonlinear control model will be forthcoming from the Prof. Ellina Grigorieva when data is available to estimate the parameters.

Good Luck.