Tuesday, May 25, 2010

The Woe of the World

Arnold Kling and Tyler Cowen attempt to present a point which is most difficult to define through its very nature. I am equally at fault in use of my analysis, as any mathematician and/or economist will outline for the Confused. I will start at the simplest, then get flat obnoxious–Some will claim Wrong! Economics is based upon Averages–the most commonly utilized math concept. Production quotas are based upon construction of absolute items. Their only target reference is the economic Averages of Income for establishing Market and Sales fields. The trouble comes in the nature of Averages, where half the population of the Average makes less, while half of the Average makes more Income. There is a Product Satisfaction in Consumption which is a relative absolute–Case of variation–the 3-car family. It all means that half of the Production quota is easily fulfilled and consumed, while the other half needs finance of some sort; enter the realm of Credit.

We could site Production quotas based upon absolute ability to Pay; and live in the land of our great-grandparents, with their limited degree of Living Standard and choice of Product. This Scenario does not please either the Consumer, or the Producer. This creates the initial impulse for Consumer finance. It is a joyous choice, even if We all feel it is not at times! Credit is basically a bet made on the future ability to sustain a level of Income. Here is where the Problem is created. That future ability is itself an Average–meaning that half of Incomes will do better than expected, but half will do somewhat worse. The later half requires some form of refinance, as the strained circumstance becomes known. This means lengthening the repayment period at a lower level of individual payment.

The trouble comes in the fact that Credit itself relies on Averages which are based upon Income. This means that half of the population can meet all their Credit obligations easily, with some particular extra which I will call Investment or Savings–choose for yourself. The other half, though, will require the added refinance; itself based upon an Average of Income, meaning that again half will need some form of refinance. Boom periods are terrible in their creation of self-esteem, and Bankers have to constrain Consumers in great part; while themselves being afflicted by the enthusiasm of the Boom. Busts are those periods where the self-esteem is pricked, and the entirety of the economic system watches the escaping funds with morbid desire; bankers unable to acquire deposits, Producers unable to pay their Production Costs, and Consumers wondering How to pay their accumulated bills–made potentially extreme by the process of Layoffs and reduction of Work hours. Booms almost insist on over-expectations, second generation if not first generation. Busts are almost always first generation recognition of the lack in absolute amount of Money to pay for previous expectations. lgl

3 comments:

spencer said...

Average only sometimes means that half the population is above it and half the population is below it.

Lawrance George Lux said...

Spencer,
Again, you show the dangers of Averages. It all depends upon the amounts involved, and the variance between the sums engaged within. Still, it can be said that a lot more than just a few borrowers are in deep water in any given Average. lgl

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