What's the Difference?

For the investment analyst, assessing the probable direction of the risk going forward will determine a winning position.

If you have been following the risk assessments on this web site, you were not surprised with the prospect of a depressionary trend. A depression is not impossible, it is just not very probable. Being favorably positioned is, then, as we explored in the previous article, a function of identifying the limit.

Not being stuck with all the risk--constantly being offset, or suddenly shifted, to unwitting, counter-party, market participants--is job one. The risk of loss is 100% (it is fully assumed). Remember that the benefit is modeled to derive from a detriment.

That financials ontologically operate through efficient markets to provide a non-zero-sum benefit is a false assumption of the working model. No, instead, we are looking at cutting entitlements, for example, which is a significant difference in the macro-risk assessment since the Great Depression.

Cutting entitlements is pro-deflationary, not pro-growth. Added to the current stagflationary trend, the probability of a depressionary trend increases dramatically--a probability that has been both fiscally and monetarily minimized since the Great Depression.

While financial assets will not sit for long in near-zero interest rate environments to avoid the probable risk, these assets will not be invested pro-growth either.

The difference is abandonment of the more "liberal" model for economic growth--like entitlements--that provides the demand necessary to resist a depressionary trend (and remember that a depressionary trend is detrimental to both the elite and non-elite alike).

Supporting a depressionary trend does not fit the benefit-derived-from-detriment (the zero-sum) model. We have thus reached the limit. Beyond this limit is where the benefit begins to accrue to the non-elite at the expense of the elite in a macro (Non-Pareto-Optimal) proportion. It is what led to the institution of entitlement programs that conservatives erroneously argue is causing the current, deflationary trend.

To prevent blinding greed and unenlightened self-interest from unwittingly positioning itself to take the offset-and-accumulated risk all at once in a crisis proportion, liberals have been there to save the capital from collapsing under the weight of its continuous consolidation. If a political realignment does not occur, a Non-Pareto-Optimal distribution will naturally occur from the accumulation. Thus, a political realignment will occur and a depression will be averted (consolidating order from the naturally occurring chaos that, according to liberals and conservatives alike, tends to deconsolidate the risk proportion into inefficient markets).

Liberalism, however, is a symptomatic treatment. Since it borrows the funds from the accumulation, errors continue to accumulate, supporting the problem to be solved with budget deficits, an increasing tax burden, and declining income. Just because the probability of a depression is next to none does not mean we will not get close, bouncing along the bottom with a persistent deflationary trend supported by political (ideological) compromise. The "effective" sum of the errors is conserved to fit (validate) the expected value (the fully assumed risk) of the working model.

It is a significant error to cut entitlements without reducing the need--that's why they are called entitlements, because they provide for public needs. Entitlements are the difference between a recession and a depression (the difference between assuming the macro-risk proportion and consuming it), and that's why the difference is highly improbable (politically unpopular among the elite and non-elite alike).

It is a significant error to think cutting entitlements will reverse the recessionary trend and put us on the path to prosperity. No! It will cause a depression.

Avoiding a depression has an anchoring effect. It allows the false assumptions of the model to ideologically operate despite empirical disconfirmation. Assuming the non-zero-sum ontology of efficient-market theory, for example, forces the losing, counter party to sue for relief by proving the intent to cause detriment. The derived benefit is affirmatively defended by arguing that complainants are out-competed into a legitimate loss, thus providing a non-zero-sum benefit in which markets ontologically maximize efficiency by putting the inefficient out of business (by causing detriment, but the loss, it is argued, is more than offset with the benefit of a more efficient market). So, for example, firms that fail (and the unemployment that results) due to the practices of too-big-to-fail financial firms and the Great Recession is really a corrective phase that strengthens our economy by virtue of efficient markets that ontologically exact detriment. Losers are the culpable party. They lose because they deserve it and society benefits from the loss in non-zero-sum.

Assuming financials operate in non-zero-sum by bankrupting us into market efficiency is a false ontology. It is a false assumption of the working model resulting in a Pareto Optimal, political settlement that deontologically conserves the consolidated value of the risk proportion. It anchors us to both the validation of disconfirmed, ideological hypotheses and to the risk-averse realpolitique of always preventing the worst possible scenario rather than pursuing the best.

It's easy to argue we are being risk-prone if we are not always averting a probable crisis. Bailing out too-big-to-fail firms is, for example, to avert a crisis of overwhelming proportion, which implies (validates) their consolidation is the best it can possibly be in priority. Thus, bailing out risk-prone firms in priority (with the risk of loss fully assumed) is being risk-averse by default. It then appears there is not much difference between being risk-averse and risk-prone, which is politically safe (Pareto Optimal).

It's just as easy to argue we are being risk-averse if we are always pursuing probable success rather than achieving the prospect of abject failure in a too-big-to-fail proportion.

By default, pursuing the best possible scenario in priority always confirms (rather than validates) the worst by its prevention, which makes all the difference.

Rather than continuously confirming the angst (the worst) of our economic existence with recessionary trends (like the Democratic-Republican "regime of re-action" is binomially apt to do), "We the People" demand leadership that makes all the difference.

The American Revolution took the risk of challenging the virtue of consolidated power, and "We" are still politically prone to confirm the virtue of its deconsolidation to provide for The Commonwealth.