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.

Risk Reduction and Financial Reform: Ensuring the Measure of Popular Consent

The best way for a bank to maximize its margin is to be so big that it has virtually no risk. The risk is most fully reduced with an economy-of-scale efficiency so that it accumulates in the space of public policy (the gamma risk).

Within a public policy space, the-economy-of-scale efficiency is organizationally extended so that the risk can be managed in aggregate. The specific types of transactions that accure the gamma risk are largely lost in macro-reform measures, like raising capital requirements (increasing the economy of scale), to manage the "big" risk. The space is then defined as mitigating the damage of the accumulated risk, not preventing it. Government is then operatonalized into the economy-of-scale efficiency, effectively being organized to support the problem as it acts to resolve it, giving the accumulation of risk an element of presumption that can then be considered an assumed risk (an exculpatory ontology) of economic participation.

The reason aggregation of risk results in crisis is because the accumulation requires a distribution to be sustainable. Value becomes so accumulated that it collapses under its own weight. The solution is, obviously, to prevent gamma accumulation of risk deliberately aggregated into an economy-of-scale. The too-big-to-fail proportion results in public policy designed to alleviate crisis rather than prevent it. We then get the deliberative policy we need (the elitist model), within a defined policy space and time, rather than the policy we want (the pluralist model of popular consent).

This is not an ethical problem, per se, but an organizational problem. The firms are allowed to be so big they can rig the market to maximize income, and so they do by popular consent. Maximizing margin is what shareholders want. The crisis that always results from accumulation of gamma risk, however, tests the legitimacy of popular consent and the intelligence required to correct "the problem" independant of a moral capacity.

Either organizing firms to accumulate gamma risk is not considered to be wrong, as Lloyd Blankfein maintains, because it provides liquidity to markets by "making markets," or a deliberate fraud and deception operating with the legitimate consent of those that are harmed. The problem is then a function of ignorance and stupidity and not a moral deficiency.

Considering the operation of an economy-of-scale efficiency to maximize liquidity of markets resulted in liquidity crisis of monumental proportion, a considerable amount of intellectual deficiency is presumed by the "market makers" and now the "policy makers."

Since hypotheses have been clearly tested and disconfirmed, measures that resist the problem have gained an empirically generated moral imperative, however. The activity of policymakers within the policy space now squarely faces the legitimate consent of the governed, naturally endowed by inalienable right and Constitutionally protected by government authority. Its verification will be a categorical measure of both intellectual capacity and moral character that avoids catastrohic accumulation of risk.

It is possible to ensure a genuine consent of the governed in priority. It requires deconsolidating the risk rather than letting it accumulate to a gamma risk proportion.

Ensuring the measure of a popular consent is absolutely critical to risk reduction. That is why economy-of-scale organizations extend into the public space. It is necessary to gain this critical legitimacy of power and reduce the only remaining risk--the risk of liability determined by the consent of the governed, or the gamma risk.

All means to reduce the liability by raising the requirements to accumulate the risk supports the causal factor--consolidation of industry and markets. Resolving to such measures cultivates the problem.

An economy-of-scale cultivates to afford transfering the risk (maximizing the marginal efficiency). Capital then accumulates into the value that supports the risk (regulatory arbitrage). The value accumulates more capital seeking the value that affords more risk, accumulating the liability into a crisis proportion. Thus the need to avoid the risk of liability with an indivisible aggregation into a public space over time (accumulating the gamma risk). It instills the false belief (the policy) that avoiding the liability (the crisis) reduces the risk that causes it.

Avoiding liability, however, does not reduce gamma risk. It allows it to continue accumulating, recycling into a crisis proportion. The only way to actually reduce gamma risk is its disaggregation.

Crisis Indicators: Reducing Risk Without Reducing Growth

We all want to reduce risk. It ensures the probability of marginal benefit over time, but it can also mean ensuring the margin itself in zero-sum with an increased risk of liability-to-the-sum accumulated (increased gamma risk that will likely result in application of government authority).

Increased liability-to-the-sum accumulated (increased probability individuals and organizations can be held liable to a retributive value) is a cumulative risk that indicates crisis. The probable risk that Goldman Sachs would incur a liability to its cumulative benefit, for example, had been steadily accumulating, presenting in the form of high profit with slow growth.

Goldman Sachs is an investment bank. Its job is to form capital ("make markets") to produce growth. Most of what investment banks do, however, in league with hedge funds, is to consolidate industry and markets into economy-of-scale efficiencies touted to increase productivity at lower cost.

What investment banks and hedge funds really do, as was again confirmed with a recessionary trend rivaled only by The Great Depression, is organize the economy to reduce the alpha risk, ensuring the margin of firms in zero-sum. As the economy-of-scale efficiency reduces the alpha risk, the risk of liability increases, along with beta-risk volatility, indicating crisis.

Ensuring the margin in zero-sum virtually eliminates the risk of loss in the form of a constant accumulation of gain over time. It always leads to crisis because expanding the margin does not depend on expanding the pie for distribution, but consolidating it for consumption. The result is both inflation AND unemployment, two attributes that are not supposed to occupy the same space, but are supposed to trade off into inflation OR unemployment.

According to conventional wisdom, business-cycle analysts say recovery from an investment-driven recession takes about five years. The value of the capital formed within that period (inflation and unemployment), and prior, will be cumulatively retributive and liable to the slow growth (the value accumulated). Without a shorter term on the cycle, the liability will be difficult to avoid and, of course, the argument will be made that growth will not occur without increased risk that can only be had by consolidation into an economy of scale.

The recession, then, according to economy-of-scale proponents, produces the means of taking the risk (the consolidation of capital) that effects growth. (The argument is, of course, post hoc because the risk taken by consolidation of capital markets caused The Great Recession.)

Is it possible to reduce risk without reducing growth?

By reducing the gamma risk, it is possible to reduce risk without reducing growth.

Reducing the zero-sum reduction of risk (reducing gamma risk accumulation) is a pro-growth measure. The two variables are coefficient: zero-sum reduction of risk equals the consumption of growth so that the rate of reducing the zero-sum reduction is coefficient to the rate of growth.

When alpha risk is in reduction, the benefit accumulated is slow growth, keeping both inflation and unemployment high. The result is a high-margin whipsaw effect. All but the highest income class is affected by the whipsaw, accumulating the gamma risk.

Health care reform, for example, will support medical costs so that a class of professionals can achieve a sustainable income of reduced alpha risk like insurance and pharmaceuticals operating with an organized economy of scale. Since this will produce a massive accumulation of wealth, and power, that will likely integrate industries and markets within the sector, the risk of general crisis is increased, not reduced, with an economy-of-scale efficiency touted to control the cost.

If the accumulation is by government authority, the liability-to-the-sum accumulated is reduced along with the alpha risk.

Having gained the force and legitimacy of ultimate, legal authority, government "reform" of the health care sector was the ultimate achievement of risk reduction. Replicating that success with financial reform is all but sure with a government authority that favors an economy-of-scale measure of efficiency across all jurisdictional boundaries, both public and private (the Hamiltonian model of political-economy in which power efficiently consolidates into the capable hands of a power elite and guides the wealth of nations toward the general welfare).

Reducing the zero-sum reduction of risk (contrary to the Hamiltonian model--deconsolidating rather than consolidating) reduces the unavoidable gamma risk by distributing it in the form of alpha risk.

Organizing to maximize, rather than minimize, the alpha risk, maximizes growth and reduces systemic risk, reversing the specific indicators of crisis.

What's the Difference?

Small investors need to recognize the differences between today's economics and the past. Identifying false indicators is key to successful investing and preservation of net worth.

The economy undergoes innovation to maintain control over the determinants (the indicators) of value and the distribution of the value. The innovation is largely driven by gamma risk--public sector intervention that affects value and its distribution (see the article, "Assessing the Value," and "Indications of Recovery" at griffithlighton.blogspot.com).

Gamma risk innovation occurs mainly to avoid and recapture payment of the retributive value (the distribution of capital that relieves liquidity crisis and reverses a deflationary trend). For example, the dip in the price of crude oil, oversold to nearly $30/bl signaled a recovery. The recent spike in the price, overbought over $50/bl reverses the trend.

The causal relationship between the price of the energy benchmark and the directional trend of the economy is quite clear. In spite of political measures to infuse liquidity to cause a sustained distribution that will stop and reverse the deflationary trend, the price of crude is being used to effect (command) the trend posteriori. The gamma risk is being effectively managed by the private sector.

As the retributive value is politically infused, energy prices increase, consolidating the infusion and reversing the trend. The portion of the capital infusion that does trickle down inches the economy toward recovery with a highly measured pace determined by the private sector.

The political element of the political economy can claim being in control to satisfy the demand for public action while, at the same time, the private sector commands the pace of recovery. The gamma risk has then been successfully managed and the distribution of value (the retributive value) legitimately conserved both publicly and privately. It is an ingenius application of the Hamiltonian model of power and political economy that maintains a strict class distinction as the result of the naturally endowed freedom of each individual to equally pursue life, liberty, and happiness without intervention of the sovereign (government).

Equal pursuit does not ensure equal results, thus the need to manage the retributive value and the gamma risk to the reward.

Self-determination of "The People" (the legal sovereign) obtains by a long and complex process of illusion in which both wealth and power are consolidated and conserved with the force and legitimacy of public authority.

The Hamiltonian model survives by innovative means. The main threat to its success is a progressive tax code that will not allow the capital infused to pluralize the economy to be consolidated and the elitist model conserved. Changing the model is not mere normative sentiment, but a descriptive analysis that accouchers the practical understanding of trend indicators and predictive utility.

Identifying what the difference is, the innovation, that gives meaning to the old adage, "past performance is no indication of future performance," and why economic data and trends are too often reported as "unexpected" by analysts, allows the small investor to manage the risk with the certainty of current means to ends that must predictably conform to old legitimacies (normative legal parameters).

Buying an oil futures contract is certainly not illegal, but if capital is allowed to consolidate and massively move into futures contracts, the effect determines the direction of the economy. The cause-effect relationship lacks the normative pluralistic legitimacy of free market economics. Technically correcting for it (the gamma risk) is where the innovation occurs and the predictive utility of the difference obtains.

Notice that the recent rise in the price of crude correlates with the "unexpected" trend back to deflation. It is a causal relationship that will keep the economy in a stagnant state (see the previous article, "Crude Indicator" at griffithlighton.blogspot.com).

Until there is a more progressive tax code in place, rising energy prices will falsely indicate a definitive SAR recovery point as long as it is a speculative means of directing it by reversing the trend.
A more progressive code will make pluralism more profitable. Energy prices will then rise on the health and wealth at the fundament (on demand and not command). The recovery phase will otherwise be weak and stagflationary with a strong deflationary tendency that will appear unexpectedly only by those that do not know the difference.

The precipitous drop in the price of crude late last year signaled the beginning of the recovery phase of the current business cycle. Recovery will be expressed with a positive, long and linear slope when the noise (the deflationary tendency: the short-term effect of the recovery indicator) is regressed from the oscillation.

At this point, falling energy prices is a means of controlling the depth and breadth of the deflationary trend and the amount of retributive value accrued, manageably spreading the gamma risk on that value over time. Each peak above or below $50/bl is a short term accumulation and distribution within a stagflationary macro model.

The cycle of boom and bust is innovated into more frequent, short-term events favorable for arbitrage and leverage finance that cultivates a take-the-money-and-run mentality. A more progressive tax code is a sure cure with a level of certainty that can be measured by the level of resistance to it if not the carefully deliberate ignorance of it.