Tracking Risk at the Core

The Fed tracks core and headline inflation risks to pick a tool that shapes the trendline. Headline inflation is marginal risk--the kind of risk that has a hedged, or leveraged objective, affecting the core values and the probable direction (the line) of the trend. Monetary policy is used to direct the line (the probability) of the trend, managing the distribution of consolidated risk in the gamma (political) proportion.

One lesson Hamiltonians learned from the American Revolution, and subsequent crises, is that the extent of the risk must be carefully tracked and managed at the core. King George undervalued the extension of the risk, being too alienated to detect the signals at the core. By divine right, he considered the risk to always be of an economically alpha proportion, and at times beta, but the risk went fully gamma (it became politically unavoidable and economically irreversible).

Maximizing the profit margin (tracking costs and limiting liabilities) emerged with market mechanics to provide capitalists with empirical tools to measure risk. The modeling used by liberal, free-marketeers was much more precise than the crown's whose legitimate interest was assumed secure by divine right and tradition.

The interest of the crown was assumed endowed by the creator and enforced by the accumulated power of the sovereign (increasing the rate of its interest by mere extension of the rents). Its naturally endowed interest became the collective power of The People with a model of risk that always assumes the risk of loss (thus, for example, insisting a bill of rights be written into a constitutional from of government--core values that delimit the political extent of the risk).

The post-Revolutionary model is more precisely designed to prevent risk of loss to the sovereign which, after the Revolution, became The People. The power elite is beyond and above the sovereign. It is supra-sovereign. Its power is demonstrated by a consolidated management of the risk so that, for example, when the dollar and the price of oil suddenly tracks directly instead of inversely, value is derived from the signals that serve to indicate the direction of the risk. While The People (the non-elite) are at a loss to explain the seemingly random signals, the extent of the risk has been determined by fiat, like the crown did, through consolidation of wealth and power. That consolidation includes all the risk that comes with the reward, the extent of which eventually demonstrates at the political core with the risk of loss fully assumed.

The risk of loss fully assumed is at the core of social contract theory that is the dominant feature of revolutionary philosophy. Rousseau's fantasy of the "noble savage" is merely an ideal expression that measures the natural extent of the risk (the freedom to choose). Of course, there are perennial attempts to renegotiate the contract (novation of the risk), giving renewed legitimate value to the fully assumed risk of loss in the form of popular consent. We had "The Contract With America" that, when fully applied, gave us the Great Recession, and that agenda has been subsequently renewed in the form of "The Pledge" following "Change We Can Believe In." These elite-negotiated political settlements are a means of extending the value of the risk which can never be reduced, only avoided, accumulated, and inevitably redistributed.

The wealth of the English crown, for example, continues to decline to this day; and instead of economic catastrophe, the Revolution produced wealth of unprecedented proportion without the divine direction of the crown. We have more people now with a royal-size sense of self-proportion than Hamilton himself could have ever imagined or, perhaps, would care for, suggesting that wealth tends to be progressively pluralistic when the risk becomes progressively more extensive (overleveraged) from multiple sources. Thus, in order to conserve the concentration of wealth and protect it from political risk, it is necessary to keep the extent of the risk in close account. It is necessary to keep the risk consolidated and centrally controlled, like with a central banking system.

The tendency to pluralistically avoid accumulated risk is demonstrated, for example, when investors diversify portfolios. Ironically, while the more pluralistic the economy is the less risk accumulated, there is still a tendency to organize for consolidation (too big to fail). To accommodate this contradiction of values, the extent of the risk is closely accounted for at the margin to measure the effect at the core, formulating the working hypothesis that the number of jobs, for example, directly correlates with the marginal profit which if reduced (i.e., taxed or in any way disinflated or deconsolidated) causes unemployment or deflation. This is a false hypothesis that must be maintained with a centralized authority that keeps the risk from naturally deconsolidating.

The Federal Reserve's accounts are now brimming with both qualitative and quantitative easing. Its current account reflects an extent of liability (overleveraging) not seen since the Great Depression. In order to prevent the liability extending into an unmanageable, inevitable distribution that pluralizes (deconsolidates) the system with political authority, the central bank must act to reduce the liability. The bank takes action so the risk is politically manageable, resisting the pluralistic tendency of power over time and political space.

Following the Great Depression it was decided market stability is best accomplished by closely controlling and accounting for the distribution of risk from a centralized authority. Since risk is a conserved quantity, however, having a constant value of coefficiency, a philosophical risk occurs with the distributive value. The legitimacy of the coefficiency must also be interpretatively managed.

Monetizing market stability from a central authority means it is not a free market unless, of course, the authority intends monetizing to pluralize and expand a competitive marketplace with disinflationary tendencies at full employment. Since that would be detrimental to the accumulation and consolidation of wealth, markets are monetized to "ease" the risk of consolidated capital and markets so that when crises occur there is not a punctuated political leap into a more pluralistic marketplace (a more free and unconsolidated marketplace) to add supply, increase employment and avoid crises.

Instead of pluralism, the marketplace is monetized to allow for economy-of-scale efficiencies (maximum margin with minimum employment, like we have now). Monetizing accommodates the crises that result without economic collapse, creating what is "too big to fail." These large-scale firms can horde cash and deflate the economy, and the more the economy deflates, the more valuable their cash reserves become. If the cash is put in commodity futures, for example, prices rise and extends the risk (raises the economic rent). The risk becomes so consolidated that it is unstable. To prevent the beta volatility going gamma, it is monetized to lower the rent (QE), but not without increasing the debt, which overextends the risk. Overextension of consolidated risk re-distributes wealth by credit default, reducing the net worth of average payers as the value of cash reserves increases.

Consolidation of risk is evident in sudden trend reversals (implied uncertainty that tends to panic the marketplace). These trends (impulsive and corrective waves) are postulated to track the extent of the risk. Saying, for example, that a weak dollar causes oil to rise is a hypothesis that, oops, is sometimes expostulated to demonstrate a highly consolidated extension (a demonstration of power) that is of questionable, legitimate value. (Keep in mind that trying to rig the market is, in fact, a criminal activity. It can hardly be considered, as one Goldman Sachs employee put it, "doing God's work" if The People are expected to lose by means of credit defaults swapped in free-and-open exchange by entities with the power to manage its fullest extent with an economy-of-scale efficiency.)

At this point, the free-market legitimacy of accumulated wealth and power is so far gone that expressing the need for a more pluralistic legitimacy is reduced to a perfidious left-wing ideology that endeavors to destroy the productive efficiency (the economy of scale) that is the "natural" course of capitalism (the trendline to be managed).

Rather than being applied to confirm a free-market legitimacy, monetarism is being applied to confirm the efficiency of large, economies of scale (firms that survive the business cycles that consolidation causes). Essentially, monetarism is used to resist the effects of a disconfirmed hypothesis, easing the burden of risk that is cyclically overextended into a crisis (gamma-risk) proportion.

The time, effort, and resources spent easing the effects of accommodating consolidation would be better spent deconsolidating the risk. Instead of monetizing deflationary debt, we should be accommodating disinflationary growth and let free-market economics manage the risk without a centralized authority.

Risk that is deconsolidated and pluralistically managed in priority ensures that no one component is too big to fail the system, or even cause a large spike in unemployment with a deflationary effect.

Ensuring free-market economics ontologically provides in priority (with a naturally occuring empirical, consensual legitimacy) what central banking badly approximates in posteriori--market stability.

Forcing the trendline is more like a vector analysis that tracks the velocity of opposing forces. While the Fed, for example, is being accommodative, it is also trying to encourage (vector) capital into employment, but without disinflation (growth). We see then that the central bank is serving two agendums--to achieve employment without growth.

If, for example, capital seeks employment, less capital is being applied to bid-up commodity futures, signaling a core recovery and the risk of core inflation. With capital consolidated in oversupply (the consolidation of the risk), supply is not being added relative to prices, and commodity prices are again pressured with headline risk. As that risk consolidates, the trendline retraces the deflationary track, resulting in a stall (a double dip). The risk of core inflation is then forestalled with an economy-of-scale-efficiency accommodated by the central bank.

The frequency of expansion and contraction renders QE policy an ex nihilo addition to the public debt. It becomes a component of a perpetual debt machine that perfectly fits the Hamiltonian model. If we want balanced budgets (no budget deficits and less need for government spending), this model must be thrown out.

The copious amounts of added liquidity required to maintain a deflationary, debt model rather than a disinflationary, equity model supports clever invention and use of capital that makes "taking risk" not a function of growth, but creating risk and shifting it to the uninitiated. Options markets, for example, are a mechanism for "making the market."

Making markets means creating and transferring risk. It is a means of controlling risk, but creating something does not mean it is in control (thus the need for the central bank's authority to headline the risk). Pressuring commodity prices without adding supply, for example, arbitrages the risk and sets up trades (call-put options) that indicate, or headline, the extent of the risk.

(Keep in mind that risk is not created from nothing. Risk, like capital, is a coefficient constant with accumulative and distributive value. Leverage schemes "create" the opportunity for capital gain by manipulating the coefficiency. For example, a 30-1 leverage ratio does not increase the amount of risk, it extends it, pushing it into a gamma--political risk--proportion. The extensive ratio induces a philosophical risk of legitimacy--the kind of risk that manifests the accumulation of revolutionary attributes demanding a corrective wave that distributes value. The choice, then, is nature or nurture. We can peacefully nurture the value--continuously monetizing the debt into a pluralistic extent, for example--or let nature take its ontological course and realize the dystopian ideal of the "noble savage." Pluralism is the ontology to be opted for here. A free and unconsolidated marketplace ensured in priority prevents the impulse to savage the meek in the name of nobility.)

Otherwise known as hedging schemes, "making markets" (rather than adding supply and the employment--the demand--it requires) magnifies the margin with an over-extension of the risk (risk without growth resulting in a net loss, or deflation caused by an overaccumulation at the margin). If that margin is not distributed to add supply, the risk tracks an inflationary trend at the core which, according to the Fed, signals a recovery. Unfortunately, if that false signal is used to indicate less need for government spending (deficit reduction), we will be tracking a depressionary trend and a political, gamma-risk proportion that will not be monetized (hedged) into the future with any credibility.

The time will have arrived for the Hamiltonian model to be abandoned, but that is not going to happen. The deficit will never be reduced enough because the demand (the gamma risk accumulated at the core value) will be too high.

The political will to shape the trendline (to shape the probability of the future), and the tools to shape it are well in hand. It is time, however, to switch to a more pluarlistic model that ensures (accommodates) growth rather than arbitraging the risk in priority. It does not mean that arbitrageurs are put out of business. It means the risk is arbitraged into deconsolidation instead of consolidation.
Growth (added supply rather than an inflated rate of interest in a declining supply) is a reward that distributes with the risk rather than consolidated into a crisis proportion.