Repairing Sovereign Indebtedness: Get Ready...

Sovereign indebtedness in democratic states can only really be resolved via three methods (or some combination thereof):

1. The default route (cancellation of debts)
2. The austerity route (drastic spending cuts and tax increases)
3. The inflation route (“printing” money)

The Course Forward

Given that governments will not risk losing their sovereign borrowing power, the default option becomes unlikely. Moreover, given that voters will never consent to significant cuts in public programs or dramatic increases in taxes, the austerity route becomes equally unlikely. This leaves the inflation route (or “printing” money) as the most likely course forward for democratic states. Note that an important side-effect and key attraction of the inflation route for sovereign governments is to reduce the size and scale of public debt and entitlements through the inflation mechanism itself.

Best Advice

My best advice for workers is to get ready for inflation. Once the government embarks on the inflation route, unemployment will increase and remain high for the duration. Also, cost-of-living increases in pay and benefits will lag the inflation rate significantly. Even a 6-9% inflation rate over 7-10 years could mean at least a 40% reduction in real wages (and fixed pensions). Convert all existing debts (and especially mortgages) to fixed rate notes now, and eliminate all variable rate debt from your life, including credit cards. The greatest challenge for workers during periods of inflation is the risk of unexpected unemployment as firms and governments alike reduce real spending and investment under inflationary pressures. Again, get ready...

Related Posts:

How High Can Inflation Go...?

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis

The “Orderly” Insolvency of States

German Chancellor Angela Merkel recently stated that the European Union needs a process for the "orderly" insolvency of its members. Does the US also need a process for the “orderly” insolvency (bankruptcy) of its states...?

Algorithms and the New Millennium

Dr David Berlinski (2000) makes the historical observation that two great ideas have most influenced the technological progress of the Western world:

The first is the calculus, the second the algorithm. The calculus and the rich body of mathematical analysis to which it gave rise made modern science possible; but it has been the algorithm that has made possible the modern world. (Berlinski, p. xv)

Dr Berlinski concludes that:

The great era of mathematical physics is now over. The three-hundred-year effort to represent the material world in mathematical terms has exhausted itself. The understanding that it was to provide is infinitely closer than it was when Isaac Newton wrote in the late seventeenth century, but it is still infinitely far away…. The algorithm has come to occupy a central place in our imagination. It is the second great scientific idea of the West. There is no third. (Berlinski, pp. xv-xvi)

Source: Berlinski, D (2000). The Advent of the Algorithm: The 300-Year Journey from an Idea to the Computer. San Diego, CA: Harcourt.

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Enter the Algorithm

The Intuitive Elegance of Stochastic Forecasting

I created the video below using Excel (Microsoft) plus ModelRisk (Vose) to demonstrate the intuitive elegance of stochastic forecasting. The blue line represents a notional historical time-series, and the red line represents the forecasted results. I removed the horizontal and vertical axis to avoid distraction from the forecasting process. The data from each forecast path is captured by Excel and ModelRisk for post hoc aggregation and statistical analysis:



Follow the link below to learn more about the software tools I use to generate stochastic forecasts in professional practice.

Software Tools

Related Posts:

Multiple Stochastic Forecasts Illustrated

Evidence of Indeterminism

Multiple Stochastic Forecasts Illustrated

A client recently asked me to provide an illustration of what multiple stochastic forecasts look like. The graphic below is a two-dimensional example that speaks for itself...

Follow the link below to learn more about the software tools I use to generate stochastic forecasts in professional practice.

Software Tools

Related Posts:

Evidence of Indeterminism

Probabilistic or Stochastic...?

prob•a•bil•is•tic
adj.
1. Of, relating to, or based on probabilism.
2. Of, based on, or affected by probability, randomness, or chance: "The Big Bang universe is . . . exemplified in the probabilistic and indeterminate interactions of the smallest known physical properties" (Frederick Turner).

sto•chas•tic
adj.
1. Of, relating to, or characterized by conjecture; conjectural.
2. Statistics
a. Involving or containing a random variable or variables: stochastic calculus.
b. Involving chance or probability: a stochastic stimulation.

Source: The Free Dictionary

The Future of Small Business in America

The exclusive footage below purportedly shows Fed chief Dr Ben Bernanke issuing private instructions to his board regarding how best to handle America's small business lending hassles:



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More Small Businesses Needed

The “Big Problem”

Google “big problem” and see what comes back. My search for a “big problem” returned approximately 5,900,000 results, implying that the “big problem” is a hot topic. The “big problem” for me is that I cannot figure out what a “big problem” is. Everything in the news is a “big problem,” including healthcare, energy, immigration, Wall Street, the Middle East, budgets, drugs, government, the environment, and even the future of golf. But, why is everything such a “big problem”? Are there not any “little” problems in the world today? How about “medium” problems, or is it simply the case that every problem gets upsized to “big” just because? I have no idea what the difference is between an ordinary problem and a “big problem,” but if you ask me, society needs to work on its ordinary problems for a while…

The Purpose of Risk Management

Here is a useful quote from Prof Emanuel Derman about the nature and purpose of risk management:

When I worked in firmwide risk I didn't clearly understand what our job was -- control risk, measure risk, whatever? Recently I heard a very good logical and philosophical talk by Steve Allen of NYU on the whole business. He's the author of Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk. One of the things he said is that the purpose of risk management is neither to control nor measure risk, but rather to make risk transparent. It's such a clear and sensible idea. And, he said, and I think I'm quoting him correctly, that a risk manager shouldn't get fired if a firm loses a lot of money. They ought to get fired if a loss occurs owing to some risk that he didn't bring to the firm's attention.

Source: Derman, E (2007, March 13), The Purpose of Risk Management, Emanuel Derman’s Blog on Wilmott.

Watch Your Thoughts...

"Watch your thoughts they become words. Watch your words they become actions. Watch your actions they become habits. Watch your habits they become character. Watch your character it becomes your destiny."

~ Patrick Overton

Tuition, Healthcare, and the Cost of Living

Does anyone else find this chart troubling…?

Source: Godin, S (2010, April 29), The Coming Melt-Down in Higher Education, Seth Godin’s Blog.

Public versus Private Sector Wages and Benefits

Does anyone else find this chart disturbing...?

Source: Mandel, M (2010, May 3), Public Sector Pay Outpaces Private Pay, Mandel on Innovation and Growth.

How Would Californians React to Economic Austerity...?

My previous post entitled Greece: What Economic Austerity Looks Like, has inspired a new question: How would Californians react if the same economic austerities were imposed upon them by the US as part of a Federal bailout plan...?

State Flag of California

If the "Greek plan" was thrust upon California, the economic austerity measures would include:

• Reducing effective wages for state workers by 5-15%.
• Banning pay increases for state workers for at least 3 years.
• Raising the state sales tax by 2%.
• Raising taxes on fuel, alcohol, and tobacco by 10%.

Reactions...?

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How Would New Yorkers React to Economic Austerity...?

Greece: What Economic Austerity Looks Like

Recent events in Greece provide a glimpse of what economic austerity looks like. In exchange for up to 120 billion Euros ($160 billion) from the European Union (EU) and International Monetary Fund (IMF) over the next three years, Greece has committed to reducing its budget deficit to under the EU limit of 3% of GDP by 2014 (the US budget deficit as a percentage of GDP for 2009 was 9.1%). To fulfill this promise, Greece is planning dramatic tax increases and spending reductions, including:

• Reducing effective annual wages for public sector workers (which in Greece includes teachers, doctors, nurses, train workers, air-traffic controllers, and many others) by 5-15% per employee
• Banning increases in public sector salaries and pensions for at least three years
• Increasing the Value-Added Tax (VAT) from 21% to 23%
• Raising taxes on fuel, alcohol, and tobacco by 10%

I have to wonder whether Americans would accept similar austerities...

Rioting continues in Greece as workers protest austerity measures...

Sources:

Barkin, N & Papadimas, L (2010, May 2), Greece Pledges More Budget Cuts, Gets More Time, Reuters.

Morley, N (2010, February 10), Public Service Workers in Greece on Nationwide Strike, VOANews.

US Federal Deficit as Percent of GDP (2010), USGovernmentSpending.com.

Related Posts:

How Would Californians React to Economic Austerity...?

How Would New Yorkers React to Economic Austerity...?

Performance Monitoring versus Analytics

Find below a useful table (click image to enlarge) detailing the fundamental differences between dashboards for performance monitoring and analytical applications. Most business intelligence (BI) vendors blur their offerings between both categories of BI, often leaving buyers dissatisfied with the solution following installation. The ongoing tensions between information technology (IT) managers and business analysts exacerbate this confusion as IT managers tend to select dashboard monitoring solutions while business analysts often prefer stand-alone analytical applications. The differences between performance monitoring and analytics are instructive.

[click image to enlarge]

Source: Dashboard for Monitoring Performance vs Analytic Application (2010, April 14), On Target.