Demoneycracy to destroy - time for counterproductive conflicts

Actual clash in the US presidential elections is not between Clinton and Trump. The latter is not a political actor but harvests the opposition to the current step of (so called) democracy - "demo-ney-cracy". Most arguments against Trump, like the arguments against Brexit, are focused on the potential loss of profit by the most rich people. They are privatizing the whole gain of the US economy during the last half century.

Poor people, whom Clinton abuses every minute as stupid and lazy, are happy to hear that the rich may lose. It is hard to predict who wins, but similar arguments by Cameron definitely were counterproductive.  Demoneycracy can and has to be destroyed. Moreover, it is a self-destruction process as in the UK.  

Any society  progresses when  conflicts and imbalances between various fractions of population are productive. Fighting  for a better positions with all possible means is a duty not a right. As in all biological system, any small advantage may  evolve  into a insurmountable barrier. Western democracy has been following the same general rule with money becoming a one-sided filter of all benefits and advantages, including political power. Poor people have no chance to get money and power beyond pure stochastic fluctuations. Conflicts have been eventually reduced to clashes with police, however the imbalances  have been growing to enormous extent with top 0.1% of population possessing practically everything including all other people.

Productive conflicts are not possible any more and it has come time of counterproductive conflicts. Poor people cannot win benefits and power of the rich. However, they can diminish if not destroy the source of these benefits and power using democratic procedures. When Cameron or Clinton say that Brexit or Trump will result in dramatic fall in economic and financial  indicator it is a romantic song for poor ears. They are not stupid or lazy - they are deprivied of their lives from birth. What makes poor people happy is the loss of money and power. The more the better.


Brexit and the EU future: Prisoner's dilemma

Brexit was an unexpected outcome. In any case, the UK will soon regain overall control on its future and recover healthy economic and financial links with the whole world. Palmerston said in 1848
- I say that it is a narrow policy to suppose that this country or that is to be marked out as the eternal ally or the perpetual enemy of England. We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow...  

So, Brexit does not contradict this  historical view on the duty of England.

On the other hand, the future of EU as a conglomerate of unequal members  is unclear and likely grim. Here, game theory might be of service. In the situation when one can minimize own loss conditional on bigger loss of other companions it is not excluded that rational choice is to leave the EU first (or second after the UK). This is a well-known prisoner's dilemma. One cannot also excluded the influence of external forces who may propose a good deal to one of a few "prisoners". 


The worthless efforts of the Board of Governors of the Federal Reserve System and investment opportunities

Four years ago, we wrote in this blog about the strict proportionality between the CPI inflation and the actual interest rate defined by the Board of Governors of the Federal Reserve System, R. Briefly, the cumulative interest rate is just the cumulative CPI times 1.4. There are periods when the interest rate deviates from the long term inflation trend, which has been almost linear since 1972. Here, we extend observational dataset and discuss the most probable reason why the FRS actually not controlling inflation by presenting the actual economic force behind price inflation, as we presented in a series of papers [e.g., 1, 2, 3, and 4].  Overall, inflation is a linear lagged function of the change in labor force. The latter is driven by a secular change in the participation rate in labor force (LFPR) together with general increase in working age population. In other words, increasing labor force inflate process and decreasing labor force leads to deflation.
Introducing new data obtained from 2012, we depict in Figure 1the effective rate R divided by a factor of 1.37 (see our previous post for details) and the consumer price inflation. One can see that R lags behind the CPI since 1980, i.e. inflation grows at its own rate and R has to follow up. The idea of interest rate is that a higher R should suppress price inflation when it is high due to the effect expensive money. During deflationary periods with slow economy, low (in some countries negative) R has to channel cheap money into the economic growth. The reaction of inflation is also expected not shortly but with some time lag. The
The cumulative influence of the interest rate should produce a desired effect in the long run and inflation should go in the direction towards acceptable values. Figure 2 displays the cumulative effect, i.e. the cumulative values of the monthly estimates of R and CPI multiplied by 1.37. This is an intriguing plot. In the long run, the R curve fluctuates around the CPI one and returns to it. It is hard to believe that the sign of deviation of R from the 1.37CPI curve affects the behavior of the CPI, which is practically linear. Therefore, the influence of monetary policy is under doubt.
The FRS has tried all means to return the CPI to R without any success and have to return R to the CPI!
We have already described the secular changes in LFPR in 2013, 2014, and 2015. Figure 3 illustrates the evolution of LFPR as measured by the Bureau of Labor Statistics. The LFPR curve is accurately approximated by a simple function: LFPR(t) = 62.7+4.3SIN(2π[t-1978]/T). The period T=74 years and the double amplitude is 8.6, i.e. the largest LFPR change is 8.6%. Currently, the LFPR is strictly in the center of the range and in the middle of the fall from 1996 to 2034.
Our concept is based on the observation that the periods of high inflation are related to accelerated labor force growth. Therefore, we have highlighted the most recent and the next period of accelerated growth as marked red (start) and green (end) vertical lines highlight two periods. These periods of accelerated growth lasts 1/4T =18 years. Figure 4 presents the first and second time LFPR derivatives, which are used to select the accelerated growth, i.e. the period when both derivatives are positive. There is a clear coincidence between the period of two-digit inflation and the peak in the first derivative near 1978.  This is one of many facts supporting our concept of inflation. This is not the purpose of this post, however. Here, we compare the FRS decisions on discount rates and the behavior of the LFPR curve.
Figure 5 compares the difference between the R and 1.37CPI in Figure 2 (red curve) and the product of the LFPR’ and LFPR’’, i.e. the curve representing the change in acceleration. The latter curve is shifted by 6 years back in time (phase shift of approximately -30 degrees for period of 74 years). The peaks in the difference curve are well synchronized with the acceleration curve, which is leading by 6 years.  In reality, FRS decisions are fully driven by the LFPR. Moreover, the FRS is very slow in understanding status quo.
Now, R and 1.37CPI in Figure 2 coincide.  This means that the best R has to be 1.37 of the current CPI, but we all know that R will be retained below this value at least before 2020.  We are thinking now on the investment opportunities resulting from the predictable FRS behavior.

Figure 1. The federal funds rate, R, divided by 1.37 and the rate of consumer price inflation, CPI, between 1955 and 2016.

Figure 2. Cumulative values of the curves in Figure 1.

Figure 3. The rate of participation in labor force (LFPR). LFPR is accurately approximated by a simple function: LFPR(t) = 62.7+4.3SIN([t-1978]/T). The period T=74 years. Red (start) and green (end) vertical lines highlight two periods of accelerated growth. The periods of accelerated growth lasts 1/4T =18 years. The next period will start in 2034.

Figure 4. First and second time derivatives of the approximating SIN function.

Figure 5. The difference between the cumulative sum of effective federal funds rate (monthly, not seasonally adjusted) and the cumulative sum of the monthly rate (y/y) of consumer price inflation compared to the acceleration periods in the LFPR.

Strong leadership or democracy?

The figure below is self-explanatory. This is the cumulative real GDP growth in the former socialist countries (FSC) after 1990 (i.e. the past 25 years) as presented in the Total Economy Database.  The most successful (>60%) countries are Armenia, Azerbaijan, Belarus, Estonia, Kazakhstan, Poland, Slovakia, Turkmenistan, and Uzbekistan. Three to four of them are recognized democracies and the other five are under strong leadership (euphemism for pure economic discussion).  The absolute losers are Tajikistan and Ukraine (the winner with -26.2%), Serbia and Montenegro, with Moldova being still below the 1990 GDP level. All four countries have quite a controversial political configuration. Other FSC are above the zero line ranging from Croatia (4%), Kirgizia (7%) and Georgia (10%) to Latvia (55%), Bulgaria (44%) and Slovenia (43%).
It is hard to deny the general observation that strong leadership was able to create better economic conditions for growth in the countries of the former Soviet Union, except Baltic countries. Political turmoil is not creative, but we know it very well.  
I would not invest in a country without a stable political configuration.

Figure 1. The cumulative real GDP growth between 1990 and 2015 in the former socialist countries

Figure 2. The evolution of real GDP in the FSC


Reasons for distrust of mainstream political parties

The Gardian wrote: “What is on the march across Europe may not be the far right, but distrust, disillusion, even full-scale rejection of the political establishment”

What are the reasons behind such attitudes to the political establishment? 

Is it related to its

-         Irresponsibility
-         Irrelevance
-         Impunity
-         Ignorance
-         Bureaucracy
-         Arrogance
-         Estrangement
-         All in one

I feel that all of them are definitely at work in Russia but the effect is still opposite. Or it just needs 50 years to get to this point of disillusion? 


European Union does not grant harmonized solution of demographic problems: part 2

Many European countries are missing in the first part of this post. All they deserve to be presented but we illustrate the diversity of and similarities in population trajectories rather than create a comprehensive view on the development in EU demography. We still use the OECD database which allows covering the century between 1950 and 2050. Here we present a few older EU representatives together with newcomers.  Figure 1 demonstrates that three East European countries: Poland, Bulgaria and Czech Republic and five western countries with longer capitalist economic history.  Germany serves as a watershed for these two groups of countries.

Bulgaria  shows behavior similar to that in Latvia and Lithuania - extremely steep depopulation trajectory after 1990. According to the OECD projection, Bulgaria  will lose from more than  40% of its population measured in 1990.  Depopulation is striking and dangerous for survival as a nation. Poland and Czech Republic are similar to Germany – approximately 5% to 10% fall in total population before 2050.  

Switzerland looks to have all chances to succeed in healthy population growth together with Austria, who also shows gradual growth into the future. Spain, Italy and Holland are a bit controversial but also have hopes for future population rise in the next decades.

Taking into account France and the UK in the previous post one can conclude that East European countries that entered the EU are all are prone to depopulation of varying degree, while the founding members feel much better. 

Figure 1. the evolution of total population in selected EU countries between 1950 and 2050. All curves are normalized to their respective values in 1990.

European Union does not grant harmonized solution of demographic problems

Everybody knows that European Union is not homogeneous. The idea behind unification was to overcome all kinds of disparity by joint efforts. The inherent demographics processes in European countries do not obey the unification plan, however.  The OECD database allows taking a specific look at the past and future of all countries … and found that some countries go wrong way after joining the EU. Figure 1 demonstrates that three Baltic countries have been and extremely steep depopulation trajectory after 1990. In 2015, they were by 15% to 25% smaller in terms of total population when in 1990 (notice that they grew by 30% from 1950 to 1990). According to the OECD projection, three Baltic countries will lose from 35% to 40% of their population relative to 1990. This is rather grim future.
On the other hand, France and UK were, are and continue to be on a healthy growth path with a perspective of 35% larger population in 2015 than it was in 1990.  Russia has stabilized its population around 146 million, i.e. 99% of that in 1990, and will not change much in the future.

The case of Germany is most illustrative for the current political discussion of immigration in Europe. Germany loses now and will be losing its population in the future. The OEDC projection says that the UK will overtake Germany in 2045 and France in 2050. Germany is losing its biggest population position against major European economies. This might be the reason for mercantile Merkel to invite as many immigrants as possible to boost German population and return it on the growing trajectory.  Die Kanzlerin is wise.

All in all, European Union will suffer strong demographic problems, which are related to emergent recognition of fading national identity. 

Figure 1. Total population in selected European countries according to the OECD historical time series and population projections. All curves are normalized to their respective values in 1990.