Testing the Limits

Instead of testing how much disinflationary risk is possible, we are always testing the extent of deflationary risk. It not only delimits class distinction, but tests the extension of power with a demonstration of economic deprivation. Of course, too much extension leads to mass protests in the streets like we have now.

A person, or a class of people, know they are powerful if they can apply a detriment and get away with it. Confirmation of power is not only avoiding prosecution, but avoiding any and all means of retributing the derived benefit (like a tax liability). By extending the risk, the limit of power is empirically tested (like what price can be charged in the marketplace) and means are thus innovated to extend it.

Power extends risk. The more it is extended, the higher the risk you can lose it all. Thus, it is important to accurately measure the limit (like measuring the gamma-risk proportion) whether the administration of power is democratically direct (like the self-determination of a free-market system) or totalitarian.

(Measurement is a perceptual--epistemological--phenomenon. Modern psychology, for example, refers to a "signal detection theory" that describes and explains how we "know" a measured quantity is the size or shape to indicate a proper action, or whether a proper action has been taken. Prices signal buy and sell decisions, for example, and budget deficits signal a high gamma-risk proportion that requires political decisions that extend well beyond the individual's ability to control it.)

A free-market economy is the most direct form of democracy. It is fast and simple with an empirically verifiable means of popular consent immediately available down to the most intimate detail. Income and pricing is the empirical measure of consent, providing the incentive (the signals) for continuous improvement. Both productivity (price) and quality (including taste and preference, which includes moral quality) improve to the satisfaction of each and every individual (to the greatest possible extent without sacrificing freedom--the sovereignty of "We the People"--to "the powerful").

Absolutely essential to a pure democracy (like a free-market economy) is to ensure the means of empirical valuation--income and pricing--without any barriers. It keeps the means and ends of power verifiably legitimate and democratically directed toward a fully achievable, peaceful prosperity.

Housing prices, for example. How is it that the most "commonly" held asset class (store of value) has been deflated while other asset classes, like commodities, have not?

The least commonly held asset classes inflate with the deflated value of the common classes. Supposedly, the detriment exacted produces a common benefit, however: the inflated value is converted into capital to be invested in economic growth to create the income to buy the over-supply of houses. The deflated price is a "buy" signal, but unfortunately the buyers are on the sell, or foreclosure side of the market.

Positioning the counter-party, in this case the homebuyer, on the detriment side of the market is a zero-sum deliberately executed to convert value and consolidate the benefit. Market-makers want us all to believe that fate determines the arbitraged value--you ended up on the wrong side of the market because that's just the way it happens (it is just the way the market-makers want it to happen).

The only way to beat the law of averages is to rig the market. Arbitraged value relies on the risk being successfully hedged. The hedge anchors the risk to a low average value, and the reward to a high average value. Average homeowners and their net worth are anchored to this arbitraged manipulation in which the accumulated value is derived and accumulated in a better-than-average, zero-sum proportion.

The over-proportion is a highly detectable signal of wealth and power. It is verifiably better than middle class (better than average), but only if it can be maintained in disproportion; and the way to do that is to extend the risk well beyond the mean. That extension is accomplished by manipulating the market mechanism through financial asset management.

Before the accumulated value is trickled down, it is converted into wealth (the demonstrated difference between the "haves" and the "have-nots"), delimiting class distinction to those that are deprived, and those that have the power to deprive. If the value needed to in-vest common value is held in the inflated price of gold, for example, what kind of assignment do we give the moral value of buying gold rather than vesting the common good?

Remember that the current practical model (the Hamiltonian model that Thomas Jefferson so strongly opposed) advances it is morally imperative we take care of the rich in priority. Thus, the theory of trickle-down economics; and controversial as it may be, it is still the practical model in use, Democratic Party rhetoric notwithstanding.

Here we are, at this point in our political-economic history, with about 70 million baby-boomers going into retirement. They must maximize the return on their in-vestment against the overwhelming power of, for example, flash traders (hedge funds whose business is to convert and consolidate in-vested value).

Average retirees perceive the risk pluralistically modeled. Socialized to expect a free-market mechanism, in-vested incomes are easy marks for what appears a risk inherent only to high finance. Our homes, for example. If we thought they were a stable store of value as a common asset class...we were wrong! All the analytical consideratons needed to properly assess the "extent" of the risk have been delimited to the devilish domain of left-wing, communist rhetoric that will destroy the right to private property and civil society. That deprivation is not coming from the left, but from the right.

Believing in the moral value of investing the commonwealth is not a communist manifesto, not unless you think our founders were communists. Just because we must challenge the limits of deprivation being tested in the name of prosperity (which is what capitalists claim communism does, and with good evidence to support it) does not mean we are traveling down the road of populist perdition. We are exercising the Constitutional power of our self-determination in opposition to tyranny whether communist, capitalist, or whatever ideological "ist" you want to give it.

Look again at the flash trading phenomenon. It tests the limits of converting capital into consolidated wealth at an ever higher frequency--in a flash! We have made a quantum leap of probable instability with the power of empirical measurement and a technological capacity that far exceeds our moral sophistication. Wealth and power has become so over-accumulated that it no longer sees any need for any sort of subtlety, confident that being a robber baron with the moral sentiments of a malevolent tyrant is what we all aspire to and so give countenance.

Look at what the SEC and the CFTC have concluded. The May 6 flash-crash incident was the result of one large trader with enough accumulated capital to decide everybody's fate. While tyranny is exactly what a free market is not, that is not what the regulatory authority has to say about it because, as we are all socialized to believe (and especially regulators who are former employees of Goldman Sachs), an economy of scale is more efficient--thus proven.

According to regulators, there was "no uniform circuit breaker" to prevent the flash crash. That is because a free market model assumes that value is not consolidated enough to need a breaker. That means (just in case they can't figure it out) the capital needs to be deconsolidated to ensure a free market.

While there are Federal laws that specifically identify the ability to unilaterally determine markets as an illegal activity, they are not being enforced. It is illegal because markets are supposed to operate with a free-market (commonwealth) legitimacy in which no one entity can alone influence the direction of markets.

Since the flash crash is an obvious case of too much market power, the legal and regulatory authority is apparently captive. Government authority is not only captive to the perpetrators but to the theory that consolidation is not to be discouraged despite that it encourages the criminal element to freely operate at the expense of everyone else.

It seems we can consider the extent of the risk to be, at this point, fully tested and anyone that does not have a multi-billion dollar hedge fund is at risk. A free-market, analytical model does not predict such an environment.

At the supra-macro level, however, the free-market model does have a predictive utility. As risk is manipulated to yield a continuously better-than-average return, the gamma risk builds into a crisis proportion. The accumulation is not limitless--it will pluralize...the mean will be achieved, but it does not have to be catastrophic. We can choose a pluralistic model, and achieve the mean, in priority.

Testing for the allowable extent of consolidated risk, a free-market is disconfirmed; and as the yield curve goes flat, providing even more confirmation that we can crash in a flash, a double dive keeps gaining probability.

Despite all the new regulatory plumbing to prevent a liquidity clog in all that hidden, derivative plumbing that keeps Wall Street all pumped up with capital until it busts, we can fully expect, nevertheless, an over-extended crisis mode of classic overproduction.

The tolerances (the longitude and latitude) of deflationary risk will continue to be tested in a post-Keynesian policy space.

Testing the limits is to test hypotheses, which should not be limited to an either/or, dichtomous variation, but the full range of possibilities that will reduce as well as predict the probability of crises.