Discourse on the Great Recession - Harmonic - Financial Economy and the Real Economy

Discourse on the Great Recession - Harmonic - Financial Economy and the Real Economy

I had a girlfriend once that played a game, when walking and holding hands she would have me relax my arm, as we walked she would swing my arm for me, we would over time be swinging arms back and forth, but having picked up her rhythm, again over time, neither of us would know who was swinging our arms – after a time it became unclear which of us was initiating the motion. I’m unsure what she was up to exactly, it does serve however as a perfect metaphor for the harmonic that exists between the “real economy” and the financial economy. Unlike the chicken and the egg, we know what got here first; we are absent the ability to know which, however, having created the relationship, is initiating action - the real economy or the financial economy.

A harmonic describes a frequency that is an integral multiple of a fundamental frequency, unlike in physics, in the two “economies” harmonics are less clearly identified and asymmetrical at initiation yet constantly seek a revision to an equilibrium – more like colliding cycles –  1000 pebbles on the pond rather than one. It’s this degree of complexity that confounds our ability to assess causation, and worse confounds our ability to offer a rationale to the “consuming public” that is clear and effects confidence. Like Truman said “God please give me a one-handed economist”, with the economy, there are never enough hands.

To illustrate the point, contemplate the money supply relative to the real economy. Money is an abstract entity that we create at will, can effect change in the real economy, more money supply, will for a time and to a point, effect accelerated creation and consumption of goods and services. More money absent the perception of devaluation effects actuation, more money in the presence of generalized knowledge of devaluation effects no change in actuation. When the real economy expands due to supply and demand dynamics the money supply expands and as stated, when the money supply expands so does the real economy. It is this harmonic that is the crux of a central banker’s work; managing money supply to either actuate a contracting or stagnant economy or retard an “over” stimulated one. Once again, this harmonic can feed a rapid upward “spiral”, when confidence is high and the money supply is untethered, and the real economy is vibrant – inflation ensues – a little inflation is good, but a lot is toxic. When we effect a harmonic – tight complementary cycles – we have a vibrant economy and steady growth and improved lives – at any point, however, cycles can extend to create a “positive” feedback mechanism and cycles become more extreme and lives are harmed. Once again accentuating the point that artificial interventions that extend cycles come with risk – as was the case with the great recession.