http://maxspeak.org/mt/archives/002555.html

For those who will only read the first two paragraphs up on this posting let me note the big links and the big arguments. The most prominent worrier is Timothy Geithner, President of the New York Federal Reserve Bank, who gave a speech recently at the Hong Kong Monetary Authority. It is entitled “Hedge funds and derivatives and their implications for the financial system” . The cover story of latest issue of The Economist, “The Dark Side of Debt,” also deals with this matter, although mostly retaining a pollyanna view. A heavy theoretical paper showing the underlying problem is by William A. Brock, Cars Hommes, and Florian Wagener, “More hedging instruments may destabilize markets” CeNDEF Working paper 06-12, University of Amsterdam . The title says it all. And the recent data on the explosion of options and derivatives has simply not been realized by most observers, to pick one: credit derivatives, almost nonexistent in 2000, zoomed from $19 trillion to $26 trillion during the first six months of this year alone. We are in the midst of an unprecedented transformation of the world financial system that is way beyond the ability of the regulatory authorities to do anything about except to lose sleep at night, as apparently Geithner is doing. I don’t blame him at all.

Also:

The conference on econophysics, officially “Physics and Socio-Economic Phenomena” was part of the International School of Complexity at the Ettore Majorana Center for Scientific Culture, this year being the centennial of the birth of Majorana, the first to propose the neutron and the neutrino and who disappeared mysteriously in 1938 (and also wrote a paper proposing what is now called econophysics). Some heavies at this one were Rosario Mantegna, coinventor of the term “econophysics,” some folks from Bouchaud’s shop, and Mauro Gallegati of Ancona. I gave the first lecture, “Debating the Role of Econophysics,” which is up on my website.

Related synch—great article on the hidden economics behind gas prices:

http://consumerist.com/consumer/features/why-is-gas-so-freakin-expensive-263887.php

A good intro post about an overlooked economist:

http://stochastix.wordpress.com/2007/03/20/niederhoffers-fundamental-laws/

The fragility of our debt-upon-debt system (I’ve figgered it to about 4-6 levels before you get to the actual derivatives, each level bearing interest) has been pointed out (screamed, really) for years by the Austrian school of economics.

The non-Gaussian distributions can show it: one can have variance decline, the standard measure of riskiness, but have leptokurtosis, the fourth moment, the measure of the size of the “fat tails,” increase. That is, in the short run the market may seem more stable and survive all kinds of shocks as the financial markets have over the past several years as we have seen this explosion of these instruments. But there can become a greater probability of a really big and nasty crash.

I think he is talking about Cauchy distributions here, which Mandelbrot (and Orlin Grabbe) use.

Doesn’t the analogy to Kirchoff remind you of Silent Weapons for Quiet Wars?

^^I am really astonished, because in the past month my economic research has been showing me that the entire field is mostly intelligent people working in the service of elite power. 

As academia goes, not that big a deal, but what fascinates (and enrages) me is that they’re tailoring the very content of their thoughts and theories in service of the power system that hires them, so economics, just like political science, is in fact a misnomer.  They’re more like the PR wing of banks than actual scientists or mathematicians. 

There’s a number of disciplines that I thought I was having a hard time understanding when I was younger, but now I see they’re based on deliberate lies.  That would have pissed me off or freaked me out even last year, but now I see this in terms of opportunity.  If I can piece together an actual science behind this, I’ll be way ahead of the game.  If I can find a method for explaining and demonstrating what I find, I can arm everyone around me with a clear vision of what money really is and how to use it as a servant and as a weapon.  I’m glad I still have at least some hubris left over from adolesecense.

HOLY SHIT THIS WAS GREAT:

http://www.mises.org/fullstory.aspx?control=1568

Ten Recurring Economic Fallacies.

Myth #2: The Beneficence of War

A second fallacy is the idea of war as an engine of prosperity. Students are taught that World War II ended the Depression; many Americans seem to believe that tax revenues spent on defense contractors (creating jobs) are no loss to the productive economy; and our political leaders continue to believe that expanded government spending is an effective way of bringing an end to a recession and reviving the economy.

The truth is that war, and the preparation for it, is economically wasteful and destructive. Apart from the spoils gained by winning (if it is won) war and defense spending squander labor, resources, and wealth, leaving the country poorer in the end than if these things had been devoted to peaceful endeavors.

During war, the productive powers of a country are diverted to producing weapons and ammunition, transporting armaments and supplies, and supporting the armies in the field.

William Graham Sumner described how the Civil War, which he lived through, had squandered capital and labor: “The mills, forges, and factories were active in working for the government, while the men who ate the grain and wore the clothing were active in destroying, and not in creating capital. This, to be sure, was war. It is what war means, but it cannot bring prosperity.”

Nothing is more basic; yet it continues to elude the grasp of our teachers, writers, professors, and politicians. The forty year Cold War drained this country of much of its wealth, squandered capital, and wasted the labor of millions, whose lifetime work, whether as a soldier, sailor, or defense worker, was devoted to policing the empire, fighting its brush wars, and making weapons, instead of building up our civilization with things of utility, comfort, and beauty.

Some might respond that the Cold War was a necessity, but that’s not the question—although we now know that the CIA, in yet another massive intelligence failure, grossly overestimated Soviet military capabilities as well as the size of the Soviet economy, estimating it was twice as large and productive as it really was. The point is the wastefulness of war, and the preparation for it; and I see no evidence whatever that the American people or their leaders understand that, or even care to think about it. An awareness and comprehension of these economic realities might lead to more searching scrutiny of the aims and methods that the Bush administration has chosen for the War on Terror.