Re: Bubbles(was Volatility)

["John O'Donnell" <jackodonnell@xxxxxxxx>]

Harry Veeder wrote:
>
> ----------
> >From: "John O'Donnell" <jackodonnell@xxxxxxxx>

<<SNIP>>

> >Actually, the "speed of electronic feedback" is not needed,
> >only the feedback signal to respond to the effect of changes
> >is needed. The speed of the response is limited by the
> >ability to measure the effect(s) following implemented
> >changes.
>
> It seems to me speed may well matter depending on
> the physical layout of the control system and how quickly
> the system being monitored changes. But I don't know much
> about the design of control systems so you may be right.

Yes, the speed of response does matter. I was only replying
to the degree of import. The difficulty with economic
response is the difficulty of measurement. As I argue in my
_Three Steps, etc._:

<< BEGIN QUOTE >>

"The value of money is affected by many things, most of
which are beyond measure and control. Such things as war,
pestilence, fire, drought and inflationary expectations all
affect the value of money. And there are many other things
that may either contribute to the determination of its value
or may themselves be affected by the value of money, its
expected value or uncertainty in its expected value. But,
the value of money is also affected by the quantity of money
and money substitutes relative to the demand for money.
Central bank open market operations directly affect the
supply of demand deposits, a form of money in all
economists' definitions of money. And, central bank open
market operations can be both measured and controlled.

"There are many ways to express the value of money. It can
be expressed as the quantity of gold that a particular
quantity of money will buy or as the reciprocal of this --
the price of gold. It can also be expressed as a price index
of commodities such as the Producer Price Index. But the
most meaningful of the measures of money value is the
weighted average of prices contained in the Consumer Price
Index. This is not to say the Consumer Price Index is the
best way to measure the value of money. There may be better
methods. But among the presently available choices it is the
Consumer Price Index that is used for most wage and other
contract price adjustments and it is the index that most
people accept as the measure of inflation.

"Some confusion does exist between the measure and the thing
being measured -- Consumer Price Index and money value. The
confusion is not the difference of one being the reciprocal
of the other. That is a tautology. The confusion is the
distinction between the frequency of measurement of the
Consumer Price Index and the frequency of changes in the
value of money. Monthly measurement of the index is a limit
imposed by practical considerations but change in the value
of money occurs in infinitesimally small increments billions
of times a day.

"For example: Let us say that the price of bread is
one-tenth of one percent of the Consumer Price Index. Let us
further say that for purposes of measuring the CPI the price
of bread is defined as the average price of the most recent
one-million loaves sold. Then each time a loaf of bread is
sold the value of money in terms of the Consumer Price Index
changes one-tenth of one percent of one-one millionth of the
difference between the price of the most recent sale and the
price of the loaf sold a million and one loaves ago. A
similar infinitesimal change occurs every time any of the
thousands of things included in the Consumer Price Index is
sold. Just because it has not been calculated does not
change the reality that the value of money changes, up or
down, with each transaction."

<< END QUOTE >>

> >However, to affect bubbles the feedback signal is not
> >required. All that is needed is a tax that acts in
> >opposition to price increases such that the higher the price
> >goes the higher goes the tax thereby reducing the perceived
> >value of the common stock and if the price falls the
> >reduction of the tax lessens the damage to its value.
>
> I would say this involves "feeback" since the tax moves
> up or down depending on the size of the bubble. Though,
> I must confess I don't know how to objectively
> identify over valued stocks but I think the phenomena of over
> valuation is objectively real even if it is poorly understood.

I do not call it a feedback because the tax rate does not
change on the basis of individual price changes; it changes
on the basis of the growth rate the total value of all
included corporations. However, the semantic choice is
simply a choice -- nothing of any real consequence.

What is of significance is the fact that no determination of
what is or is not a proper valuation is made or needed. The
tax rate is determined by its effect on the growth rate of
capital and nothing else.

> <snip>
> >Although the monopoly tax optimizes growth of capital [i.e.
> >the value of common stock] independent from any
> >redistribution, the fact remains that a rational
> >redistribution can also be determined that also can be
> >optimized to grow t an economy. It's called a "Citizen's
> >Dividend" in _Three Steps, etc._ and accomplishes the growth
> >optimization by the same function as the monopoly tax. That
> >is, it redistributes the costs of production from "variable"
> >to "fixed" and thereby encourages lower retail prices that
> >encourage greater economic activity.
> <snip>
>
> The trouble is redistribution makes the tax even more contentious.
> People hate to imagine *their* tax money being used by individuals
> whose way of living they don't like. I don't like to advocate
> redistributive taxation as way to effect economic improvements.
> Its use should be very limited.

The monopoly tax itself is not redistibutive. It is
collected at the rate that causes the greatest rate of
capital growth. The amount is continuously adjusted so that
any lesser or greater amount would slow economic growth. The
arguments as to why the effect is true are presented in
_Three Steps,etc._

The "Citizen's Dividend" can be reasonably called
"redistribution" in that it results in a distribution of
purchasing power that is different from that which currently
exists. However, I prefer to call it compensation for the
surrender of each individual's right to property supplied by
God or nature. Additionally, the amount of the distribution
is determined by its effect on optimizing the propensity to
consume as it is adjusted on the basis of the growth rate of
the economy as a whole. Again, the arguments are ...

--
			-- jbod

		Tax Privilege, Not People
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