The Next 10 Years: Three Drivers of Economic Change beta 2

[cobben]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

"I too had to watch the video multiple times before I realized that it was describing interacting cycles of varying duration."

Has no-one here ever worked with simulations? I can't imagine that EJ is not aware of what can be done, perhaps they are using some form for the real application? Generally one can generate marketing & instruction videos directly from the simulation, but I have been away from this area for nearly 10 years, so I have no idea what the current status is.

Two schools, the intuitively obvious choice Systems Dynamics (System dynamics is an approach to understanding the behaviour of complex systems over time.)
and discrete simulation which is more used in real-world heavy duty industrial applications, where there are a large number of commercial and even open source software packages. My experience was with Witness, which at that time was considered leading, the open source packages were at that time not practically usable I believe.

[ThePythonicCow]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

Wriggly, I have to profoundly disagree. My take on this is that EJ has been on a very long journey since before he set up iTulip.

You make good points regarding EJ's journey, Chris. It is unclear to me at this moment whether the thoughts behind my previous post disagree with your comments or not. Clarity is elusive.

[Chris Coles]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

You make good points regarding EJ's journey, Chris. It is unclear to me at this moment whether the thoughts behind my previous post disagree with your comments or not. Clarity is elusive.

Then we should put it down to the effects of winter fog

[EJ]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

I actually think there's value to a simple visual representation. Many of the theories at itulip need work to appreciate, but until recently it's been a simpler phenomenon to understand - as someone said very pithily above, up and down is easier than round and round. When theories get complex, and depend upon interactions of different phenomena with their own characteristics, people tend to develop local understanding of one 'favourite' piece while remaining unclear about the global picture. This can lead to wrong decision making. I think it is precisely this problem which EJ is trying to solve - how do you give people an intuitive understanding of the system, and once this understanding is developed, enable them to dig in to each piece while keeping the global perspective. If so, I applaud the effort, I think it has legs.

What a delight to have this work-in-progress so well understood.

The old model of the bubble-cycle political economy that I explained to inquisitive readers starting in 1998 I figured out by sitting on the boards of tech companies and reading up on the history of stock market and housing bubbles. The bubble cycle model was more or less "off the shelf" and the challenge was to update and present it a way that readers, inundated with tech stock sales and marketing from the mainstream business press, could accept and absorb. iTulip was, 13 years ago, one of the very first financial blogs. I used a combination of commentary and charts to convince readers that we were not in a "New Economy" but a political construction involving regulators, the media, Congress, lobbyists, and other players. I laid it out in expository form 10 years later to a more mainstream audience in a Harper's Magazine article.

iTulip.com was inspired by such works as an original copy of Garet Garrett's 1934 book "The Bubble that Broke the World" that I picked up at the Victor Hugo bookstore on Newbury Street in Boston in 1999. Garrett wrote an earlier book on bubbles in 1911 titled "Where the Money Grows and Anatomy of the Bubble." You'd think that a scholar who understood of the mechanics of asset bubbles was in an ideal position see a new one when it arrived, but Garrett was a booster of the 1920s stock boom and a denier that it was a bubble. His ideology and the paycheck he received from newspapers that were selling the bubble in the late 1920s got in the way of his scholarship. As a financial editor and columnist, Garrett became the 1920s boom version of Jim Cramer.

The buble cycle model I used to devise the 2000 to 2001 portfolio of gold and bonds that beat the benchmarks looks obvious today in retrospect but it was heretical in 1999. I said asset bubbles beget financial crisis that beget reflations that beget currency depreciation. That means rising gold prices due to a weakening dollar and rising bonds prices as government buys debt to finance recoveries.

But the bubble cycle era is over, as I explained once again to a disappointed Italian reporter yesterday who called to interview me about the high price offered for Groupon. The answer is no new tech bubble. No energy bubble. No government bond bubble.

The three processes that define the next economic era are profoundly more complex than the single overriding one that drove change in the bubble cycle era. Not until 2008 when I was writing my book did this become more clear to me. If you read my articles from 2006 I refer to this period simply as "Period X."

Unlike the bubble era there are no off-the-shelf theories for me to use to model the next ten years. Not even Debt Deflation is off-the-shelf; a wide range of interpretations exist. No concept exists to explain the interaction of the credit cycle and energy demand/supply cycle under the condition of 1) the world's reserve currency issuer in a balance sheet recession after a credit market collapse and 2) a second world oil supply limit breach. I had to invent the Peak Cheap Oil Cycle. How will that cycle interact with high levels of sovereign debt risk that resulted from the shift of debt liabilities from private to public account? Hard to say, but all scenarios point to even further pressure on government balance sheets, as energy cost sensitive consumer goods absorb more personal consumption expenditures and governments respond with direct subsidies, such as price controls, and indirect subsidies, such as extended unemployment benefits. The monetary restructuring process part of the model is even more speculative, and a China crisis is not even in this model, so it's still preliminary.

To level-set expectations we should create a video that depicts the relatively simple single process that drove the previous 10 years and informed our investments. It consists of a single cycle of asset price inflation, deflation, and reflation. One wheel. Simple, but it was resisted violently by the media and the money management establishment.

This video is an attempt to model a complex set of processes using a system dynamics approach that will unfold as a series of events. Without a model the events will appear to be chaotic. We have other depictions in development, including flow chart and time line based overlays. The objective is to show that events that may appear random are in fact part of a deterministic albeit complex dynamic. Just as our bubble cycle model allowed us to confidently counter claims of a deflation spiral in 2009, in the future when oil and commodity prices spike then correct in 2011 we will be able to see the event in the context of the second Peak Cheap Oil Cycle and its interaction with monetary policy in a balance sheet recession. The video also suggests that there will be times when we will not know exactly what is going on because of the interference effects of the processes.

Thank you for your comments. Now back to boiling the ocean to come up with our 2011 forecast.

[ThePythonicCow]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

Then we should put it down to the effects of winter fog

The fog lifted (or so I imagine.) My earlier observation was that I figured that EJ was using this video technique to better present his analysis, but that the analysis itself was first conducted by other means. An alternative approach would be to use something like Mathcad or Sage as a primary and essential tool of the analysis itself.

[Chris Coles]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

The fog lifted (or so I imagine.) My earlier observation was that I figured that EJ was using this video technique to better present his analysis, but that the analysis itself was first conducted by other means. An alternative approach would be to use something like Mathcad or Sage as a primary and essential tool of the analysis itself.

It is quite interesting to see two people coming at the same presentation from entirely different directions; yours is pragmatic and based upon a lifetime of working within the software industry and mine is from a lifetime of having to live with a vivid imagination seeking answers to unknown questions in a very uncertain world.

[xPat]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

EJ,

Thanks for this excellent post. It was very enlightening, and for my style, at least, several orders of magnitude more valuable than the video itself.

It now seems clear that there is a strong contingent that "relates" to the video approach, so I wish you great success with this project and hope that the video will ultimately be a very successful communication tool. In the mean time, I hope you'll continue writing "the old fashioned way", to appease those of us who get much more from your brilliant essays than from a video.

Thanks,
xPat

[EJ]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

EJ,

Thanks for this excellent post. It was very enlightening, and for my style, at least, several orders of magnitude more valuable than the video itself.

It now seems clear that there is a strong contingent that "relates" to the video approach, so I wish you great success with this project and hope that the video will ultimately be a very successful communication tool. In the mean time, I hope you'll continue writing "the old fashioned way", to appease those of us who get much more from your brilliant essays than from a video.

Thanks,
xPat

Of course. Still boiling the ocean for the rare minerals.

Modeling via system dynamics is problem solving as is writing and charting data, but at a higher level. To wit:

http://itulip.com/iThinkModels/PeakC...imulation1.mov

[nedtheguy]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

redacted

[Alvaro Spain]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

I must confess that I am somewhat in agreement with xPat.

On the plus side: I understand EJ's intention of presenting us dynamic models so that we can understand what is happening on a more intuitive level. I believe that this intention is good and pure.

On the minus side: I find very difficult to understand the videos. There should be much more text explaining its content.

Of course, in my case it doesn't help that I must make an effort to understand english. I find the music disruptive to this end, but turning off the volume is a good solution. If some day EJ mixes voice and background music I am going to run into serious problems. Am I the only non native english speaker here?

It also doesn't help that I know very little about economics. If I am in iTulip it is out of necessity, because I need to invest my own money and I don't trust FIRE salesmen to do it. But perhaps my case is not unique, and there are also other iTulip members that know as little theory of economics as I do, but need the content, and more text explanation would do them well.

I am trying to be constructive here. I also belong to the excellent Chris Martenson website. The explanations offered there are much easier to understand that those offered here. I suppose that EJ tries to speak for economy proffesionals but Martenson is showing that another approach is also possible, speaking for us uneducated people.

I apologize in advance if I have offended someone with this post.

[Chris Coles]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

Maybe this is a good time to bring back the spinning heads?

Just throwing out a possible visualization idea after reading this section of xPat's comment. I like the current visualization that describes each step/process of the three cycles. Now to extrapolate on the three wheels turning around at different speeds, perhaps you can translate the rotational motion into a linear graph for each. Create three linear graphs for each cycle, translating from the rotation of the "unit circle" to a sine wave. (Here's a good video of what I mean: http://www.youtube.com/watch?v=Ohp6Okk_tww) From, there you could create a visualization of the superposition of the three waves together. So, perhaps a buoy/boat floating on ocean waves. The way I understood EJ's illustration is that there are three economic cycles occurring at different frequencies. Inevitably, there will be points in time where the maxima of the three cycles sync up at nearly the same time, causing a large variation in the superposed wave. This would probably be where the economic shocks occur. The times when the three curves add up to a minimum value would give the impression that "Hey, everything is OK". Obviously, the hard part is determining the frequency of each cycle, and where we are on each cycle at a particular point in time.

Hope this helps.

Brilliant idea, bring it on.

[Chris Coles]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

I must confess that I am somewhat in agreement with xPat.

On the plus side: I understand EJ's intention of presenting us dynamic models so that we can understand what is happening on a more intuitive level. I believe that this intention is good and pure.

On the minus side: I find very difficult to understand the videos. There should be much more text explaining its content.

Of course, in my case it doesn't help that I must make an effort to understand english. I find the music disruptive to this end, but turning off the volume is a good solution. If some day EJ mixes voice and background music I am going to run into serious problems. Am I the only non native english speaker here?

It also doesn't help that I know very little about economics. If I am in iTulip it is out of necessity, because I need to invest my own money and I don't trust FIRE salesmen to do it. But perhaps my case is not unique, and there are also other iTulip members that know as little theory of economics as I do, but need the content, and more text explanation would do them well.

I am trying to be constructive here. I also belong to the excellent Chris Martenson website. The explanations offered there are much easier to understand that those offered here. I suppose that EJ tries to speak for economy proffesionals but Martenson is showing that another approach is also possible, speaking for us uneducated people.

I apologize in advance if I have offended someone with this post.

Sensible debate will never offend.

Alvaro brings into the discussion a very important point from which we can all learn; All of us here are in a debate and as such, we are talking to a very wide audience. It is too easy to describe something WE understand, that another, from an entirely different background, cannot relate to in any way.

May I suggest EJ you try and remember the well used maxim in engineering. If it ain't broke, don't fix it.

[ThePythonicCow]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

. If some day EJ mixes voice and background music I am going to run into serious problems. Am I the only non native english speaker here?

If he mixes voice and music, I'll run into serious problems as well.

Not because of my language (I'm your typical American -- English only), but because my hearing sucks.

[ThePythonicCow]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

http://itulip.com/iThinkModels/PeakC...imulation1.mov

isee iThink ... interesting.

[xPat]

Re: The Next 10 Years: Three Drivers of Economic Change beta 2

Of course. Still boiling the ocean for the rare minerals.

Modeling via system dynamics is problem solving as is writing and charting data, but at a higher level. To wit:

http://itulip.com/iThinkModels/PeakC...imulation1.mov

Very interesting indeed.

FWIW, I would never have seen this if not for your comment. I find the content (EJ commentaries) on iTulip to be the best on the net. But honestly the navigability of the website leaves room for improvement.

I monitor the home page and I track the discussions I have already participated in thru the e-mail update system. But honestly, if there is anything else on iTulip, I'm not aware of it because I find the navigation challenge to outweigh the benefit. I know that I have missed webinars and other content as a result of this approach, but I still find the navigation too cumbersome to justify the result.

I don't mean to complain. I'm just saying that if you have all this great stuff, it would be great to make it more visible. Who knows what else I've missed...

xPat