The Profit Margin as Empirical Measure of Risk

As economies of scale accumulate systemic risk, there is a demand for government authority.

Instead of less government, there is more need for government if we allow industry and markets to consolidate. The call for reform is a call to deconsolidate the risk.

As we have seen, consolidation of industry and markets allows loss (the risk) to aggregate in the form of public debt while the reward (the profit) is retained in the form of private property. It is the Hamiltonian model in the modern world of Keynesian inflation.

Expansionist monetary policy overleverages the private sector, resulting in liquidity crises with a private accumulation of profit and a public accumulation of loss.

Curious that providing large amounts of liquidity results in liquidity crises.

Borrowing at the Fed's discount window to buy the public debt conserves the Hamiltonian model with Keynesian measures.

Liquidity is used to build an economy of scale, producing a budget deficit. Liquidity is then needed to finance the public debt bought by the liquidity. The liquidity is trapped in a perpetual accumulation of debt in which the rich (the elite) buy the debt and the non-elite pay it.

Since the non-elite do not have the means to pay the debt, the result is a default on the debt if it is not monetized.

A sovereign debt crisis is very unlikely to occur, however, unless the sovereign decides not to sell new debt to cover the old debt. If that happened, the gamma-risk accumulation would catastrophically disaggregate. It would be a disorderly resolution of risk that would make The Great Depression look like a good time.

The non-elite cannot pay the debt. Income is, by definition, deficient even when the non-elite are employed (the burden of debt must be regressive in order to maintain the elite). Thus the need for more liquidity, which is leveraged into buying a dwindling supply. Prices and profits inflate financed with private debt and public transfer payments.

Despite the inflation, the result is a crisis of deficiency--a liquidity crisis. Public debt is a measure of that deficiency which conservatives argue, post hoc, is the result of too much government spending.

The accumulated deficiency is an accumulated efficiency of the profit margin organized into an economy-of-scale consolidation of industry and markets that aggregates risk in the public domain. It is the Hamiltonian model in which the rich get richer and everybody else gets poorer, like we have now.

Not only are non-elits expected to pay the public debt (the aggregated risk), but pay elits to cause crises and take the value (the liquidity needed to prevent crises) in zero-sum. It is completely unreasonable to expect this to result in anything but a populist sentiment (reduction of the gamma risk).

Resisting the populist sentiment is an entrenched Hamiltonian model in which the elite buy the public debt (the liquidity) and the public pays it. The difference in value between elite and non-elite is what classical economists call the economic rent--the margin of profit accumulated that is the categorical measure of elite status and the cost of non-elite participation in the benefit the profit produces. Its conservation is necessary for economic growth and, according to Alexander Hamilton and the Federalists, the general welfare.

Measures taken to conserve the power elite (resist populist sentiment) is, then, a moral imperative. It is why, for example, taxes should be paid by the least able to pay (and the reason government spending should be minimal), and why liquidity (and the economic rent for liquidity) costs more for those that need it the most...because, according to conservatives, they are a bad risk.

We see then how the operational model defines the risk. The Hamiltonian model defines risk as a measure of the ability to accumulate value so that instead of paying the rent, you are collecting it (instead of paying the debt, you are buying it). The difference is the profit margin, the category of elite status, and the defined level of risk.

From the start, the model of capitalism is organized to eliminate alpha risk. The risk that holds the elite directly accountable to the renter is, as was described previously, inimical to the general welfare.

Alpha risk, according to the Hamiltonian, should be limited to the masses. It is inappropriate for the elite to be held accountable to non-elits. Thus, the concept of limited liability and the corporate, economy-of-scale model of efficiency that transforms alpha risk into an unavoidable, gamma-risk ontology. Risk aggregates in the public sector where government distributes that risk with the force and legitimacy of ultimate, sovereign (legal) authority.

According to Hamiltonians, it is in the best interest of the masses to accept the legal authority of property being the privilege of the ruling class. The difference between ruler and ruled is defined by income (the profit margin). It is a clearly empirical measure of power, and who should have it, as long as government does not act to redistribute it.

Redistribution of wealth distorts the natural hierarchy of economic incentives (class mobility) that causes innovation, productivity, and economic growth. As long as everyone is free to maximize the profit (to move up the hierarchy), conservatives posit, the risk is proportionally reduced.

The profit margin (maximizing the economic rent) is for the Hamiltonian, however, entirely a measure of negative risk. The more risk you have to take (the more rent you have to pay to participate) the more non-elite you are. Being without risk means being unaccountable, which means more risk for everyone else, not less.

The Hamiltonian model deliberately resists plurality with a higher risk assessment, and where plurality is resisted in nature, risk of failure is increased, not reduced.

As the Hamiltonian model has matured, with the alpha risk ever more minimal, the margin of profit becomes focused on the risk premium. The profit becomes a measure of pure financial arbitrage.

Generating profit with as little growth as possible is a measure of sophistication, and growth is a measure of how big an economy of scale can be built to limit the risk of liability in the corporate form (how much you can get away with operating in zero-sum, avoiding the gamma risk).

The risk ontology becomes a function of avoiding the gamma risk (politics) rather than minimizing the alpha-risk accountability. Rather than the profit being an empirical measure of accountability, it becomes a measure of unaccountability.

Instead of success determining the profit, the profit determines success. The profit margin, then, is a measure of risk accumulated rather than reduced, and its management is a function of an arbitraged transference.

Risk becomes a fractile probability that takes the form of beta risk. It requires evermore liquidity as the risk is hedged against the probable risk that is hedged against the risk...into a crisis (gamma) proportion.

The risk propagates with higher frequency as capital is used to finance its propagation rather than growth. It cannot be considered gambling because the level of risk is determined by the amount of capital invested in its propagation, including building economies of scale with mergers and acquisitions.

Fractile risk management is rationalized with use value. It harbors the utilitarian-value hypothesis posited by the Hamiltonian model: conserving the value of capital, making markets, efficiently allocating capital to maximize growth with minimal risk, securing the general welfare.

Confirming whether the welfare is generally secured by the model is, well, complicated, of course.

Economically securing the general welfare free of government intervention (allowing for organized economies of scale to manage the aggregation of the alpha risk in a gamma proportion) is a function of risk-transfer product marketing--the derivatives market that is the target of regulatory reform. It is a market that no one, of course, properly understands but the elite insiders.

Risk transfer (transformation of risk) is an esoteric domain of the market that requires, of course, the special, secret knowledge of the power elite. It cannot be empirically evaluated or, therefore, controlled by crude, unsophisticated, non-elite measures, like an alpha-risk ontology that is confirmed by the margin of profit...not without putting the general welfare at risk, of course.

When crisis does occur, as financial reformers say it surely will, the reform will be to blame. It will be important to then identify the insufficiency of reform, which will be not having disaggregated the risk into an alpha dimension.

Effective financial reform will allow the profit margin to be an accurate measure of reduced systemic risk rather than a crisis (gamma-risk) indicator.