Chapter Zero.Zero: Lessons from Baby-Sitting for Monetary Policy, Inflation, Interest Rates, Financial Markets and Everything Else
By: Ravi Kashyap SolBridge International School of Business Email:
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Topics for Discussion – Monetary Policy – Inflation and Interest rates – Capitol Hill Baby Sitting Crisis – Solutions / What would you do? – How to Become Smarter than Albert Einstein?
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Monetary Policy
Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
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Interest Rates and Inflation Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rises. In the United States, interest rates are determined by the Federal Reserve (sometimes called "the Fed"). In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns from savings are higher. With less disposable income to spend as a result of the increase in savings, the economy slows and inflation decreases. © 2016 Gain Knowledge Group. All Rights Reserved.
Interest Rates and Inflation
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Interest Rates and Inflation
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Capitol Hill Baby-Sitting Crisis Types of Baby sitting co-ops Bookkeeping system Rules for fairness Prevention of Loan Defaults Arithmetic Mistakes can be costly and hard to resolve Scrip System Hours Earned cancel against Hours Spent Designed by lawyers with seven single spaced pages of rules © 2016 Gain Knowledge Group. All Rights Reserved.
Capitol Hill Baby-Sitting Crisis Scourge of Inflation affecting the nation and the Capitol Hill Baby Sitting Co-operative. Increasing money supply (“scrip”) per capita by running budget deficits creating inflation. Strict Price Control: One Unit of Scrip for every one half hour of baby sitting time. Inflationary pressure does not increase scrip price of baby sitting. Inflation is suppressed and shortages are found.
Is there a political solution? © 2016 Gain Knowledge Group. All Rights Reserved.
Capitol Hill Baby-Sitting Crisis Recession No one spending and many people looking for jobs Force people to spend?
Inflation No one to do the job Force people to Baby sit? Increasing Salary or too much money chasing too few baby sitters
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Capitol Hill Baby-Sitting Crisis Monetary Policy Measure Thirty Hours for new members Twenty Hours returned when leaving
Golden Age Balance between going out and baby sitting
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Capitol Hill Baby-Sitting Crisis Numbers can Mislead Magic Number 7.5 150 members in 1973 Costs: 1800 + 102 = 1902 Income: 150*14 = 2100 Scrip outstanding reduces by 198 Total Money Supply: 30*150 = 4500 Years for no scrip outstanding: 4500 / 198 ≈ 23 © 2016 Gain Knowledge Group. All Rights Reserved.
Capitol Hill Baby-Sitting Crisis Numbers can Mislead Magic Number 7.5 One family turnover, with no change in total membership (150), increases money supply by 10 hours 198 hours shrinkage is offset by 20 family turnover or 200 hours So ideal turnover rate is 20/150 = 0.133 = 13.3% ≠ 7.5% If turnover is higher than 13.3% then the amount of scrip or money supply will grow. © 2016 Gain Knowledge Group. All Rights Reserved.
Solutions / What Would You Do? Truth Squad / Police / Regulators - Labor Camp Income / Expense / Coincide with Turnover Rate One Time Tax to Reduce Scrip Outstanding (Might have to be repeated one too many times) Democratic Process to change the law or charter Elections Political Power of Persons in Office © 2016 Gain Knowledge Group. All Rights Reserved.
Solutions / What Would You Do? Number of units of scrip per member should be adjusted for turnover and growth There are no good or bad people; just seemingly tough situations and mediocre role models
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Can we Become Smarter than Albert Einstein?
We live in a world that requires 2000 IQ points to make the right decisions. The problem is that the best of us has an IQ of less than 200. So we need someone like IQ-Man who is friends with Super-Man. But since they are nowhere to be found, the rest of us have to do other things. The Magic of Trial and Error Learning from other similar episodes in History Team Work Becoming Super Intelligent might just be … © 2016 Gain Knowledge Group. All Rights Reserved.
A Child’s Play The problem of creating artificial intelligence can be a child's play, depending on which adult's brainpower acts as our gold standard. Perhaps, the real challenge is to replicate the curiosity and learning an infant displays. Intellect might be a byproduct of Inquisitiveness. Another instance of an unintended yet welcome (?) consequence. If ignorance is bliss, intrusion might just be the opposite and bring misery. As the saying goes, Curiosity terminated the …
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Visions of Bubbles and Busts? Story of Beauty and the Beast! – Bubbles (Inflationary Scenarios) are seductive but scary when they burst (Recessions). – Just as Beauty and the Beast must Coexist; Bubbles and Busts must be close to one another. – Financial Markets and Asset Prices could be a signal of the building up of a bubble and a later bust.
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A List of Monsters – Recession – Confusion – Frustration – Examination
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Simply Fantastic Creatures Get Confused and Frustrated but Please Don’t Panic. Controlled Recessions might be the key to Smoothen Business Cycles. Confusion is the Beginning of Understanding. Necessity is the mother of all creation / innovation / invention, but the, often forgotten, father is Frustration. Preparing for an Examination will significantly boost Learning.
What do we learn from Beauty and the Beast? We need to love the beasts to find beauty.
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Defining Monsters A Monster is anything we don’t know. There are monsters everywhere. When we meet a monster. We can get curios and find out about it .... but if we get worried, we should forget about it ... What is infinity? What is a call option? What is on the 13th floor? What is in her bag? What is there in the train station? What is e-Mart? What did I eat for breakfast? Who is Kim Jong Kong ? Where does he live? Must be somewhere close to Hong Kong or next to another monster. © 2016 Gain Knowledge Group. All Rights Reserved.
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Some Sleeping Aids Sweeney, J., & Sweeney, R. J. (1977). Monetary theory and the great Capitol Hill Baby Sitting Co-op crisis: comment. Journal of Money, Credit and Banking, 9(1), 86-89. Monetary Policy Links: https://en.wikipedia.org/wiki/Monetary_policy#Overview Inflation and Interest Rates http://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp Nassim Taleb and Daniel Kahneman (Two very frustrated men, that I respect a lot, discuss Trial and Error / IQ Points, among other things) at the New York Public Library on Feb 5, 2013. https://www.youtube.com/watch?v=MMBclvY_EMA Kashyap, R. (2017). Microstructure under the Microscope: Tools to Survive and Thrive in The Age of (Too Much) Information. The Journal of Trading, 12(2), 5-27.
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