Thursday, August 30, 2018

Stub 3.9: Zhit or go blind

Professor Paul Jughed was Nuffin’s last expert.

Like the other experts, he was polished, smooth and persuasive. Unlike the others, he did not consider Raymond to be naive and easily manipulated.

Raymond’s interrogation of the other experts had revealed him to be knowledgeable, focused, hungry and cunning. In all, Raymond was a much more formidable foe than the academic ‘peers’ that performed quid pro quo reviews.

“And how do you propose throttling or braking the money supply to best serve the citizens of Sedelia?” Raymond asked.

Jughed’s academic specialty was the numerical simulation of “control systems” with regard to money supply and economic activity. He had published multiple papers on that topic and was comfortable speaking about it.

“The optimum algorithm involves the rapid, sequential control of interest rates, unemployment rates and exchange rates Vis-à-vis a marketbasket of major currencies.” Jughed rattled off.

“How does that work. Give me some details.” Raymond encouraged Jughed.

“One example might be where the Sedelia Fed manages the money supply to hit a target interest rate for a short period of time, say three months. Then it manages the money supply to hit a target tax revenues (which is related to the unemployment rate) for three months. Then it manages the money supply to hit a target exchange rate. It is a simple as pie.” Jughed said.

“Why three months.” Raymond asked.

“That was just an example. Actually, the Fed has to randomly vary the duration and target because people will try to game the economy.” Jughed said. “Three months is suggested as the shortest duration that will produce results that can be monitored.”

“So your proposal is to randomly change the target and duration on-target when managing the money supply. Seems like changing the target would cause the prior target to go into free-fall.” Raymond mused.

“Oh no. Not at all.” Jughed reassured him. “Economic metrics are sticky. Some of that is due to imprecision in the measurements but most of it is due to the psychological nature of humans.” The seamless integration of societal heuristics and the numerical modeling of economics was one of Jughed’s claims to fame.

“So let me rephrase this in my own words. Correct me if I am wrong.” Raymond said. “The Fed has two wheels-of-fortune that it spins. One wheel is the target metric and the other metric is the duration of time-on-target.”

“Well, not quite. It is a little more complicated than that.” Jughed said. “It is necessary to have a third wheel actually setting the target, the target interest rate or unemployment rate or whatever. Again, people are smart and will start gaming the system after they figure out the target.”

“Oh, and you might want to add a fourth wheel that occasionally adds in or eliminates target metrics from the first wheel-of-fortune.” Jughed said. He was rather proud of his ability to couch his explanations in simple language.

“And that works?” Raymond said, frowning.

“Works like a charm!” Jughed said. “The Fed is able to simultaneously control all of those metrics by manipulating the money supply.”

“That is not what I meant.” Raymond said. “The question was,” Raymond looked back at his notes, “does that system ‘ serve the citizens of Sedelia.’ “

“You describe a system where you serve the needs of a game where the goal is to hit metrics. What happens to the other metrics?” Raymond asked.

“What do you mean?” Jughed asked.

Raymond let the trap snap shut. “If I take a water balloon and squeeze it, I can make the portions of the balloon directly beneath my fingers go where I want. What I cannot control is what the other parts of the balloon does. And if I abuse the balloon, what do you think is going to happen. Right. Sploosh! I get wet.”

“You rigged the game. Your simulations meet your very narrowly defined criteria for success by rapidly firing a series of conflicting signals into a dynamic system. In street language, sir, the economy does not know whether to shit or go blind.”

Nuffin objected. “You are badgering my witness. Stop!”

Raymond turned to her. “This session has dragged on past nine hours. Do you want to make a motion?”

Nuffin made a motion to adopt the monetary policy as proposed by Jughed. It failed 3-to-4.

Then Raymond proposed that Sedelia recognize the realities of its current economic conditions by absolving all business owners of any record keeping or withholding of taxes provided they pay each employee at the end of every business day. That also failed 3-to-4.

Loath to have no proposals to present the next day of session, Nuffin and Rojas agreed to present both proposals to the entire legislature. Nuffin, by virtue of alphabetical order would present first.

Next Installment

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