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Tuesday, February 26, 2013

Basic Laws of Economics

Banks have become “too big to fail”, “too complex to manage”, “too important to prosecute”, all being quotes from the information cloud raining sweet reason on our heads, until we are soaked in enlightenment. We become aware, without understanding, of the financial system ruling our paychecks and bank accounts. I am assured only the professionals understand markets, that only sage professors can fathom the intricate relationships of finance. The professional manipulators of popular perception are free to create analogies about the federal budget being similar to two old people sitting around their kitchen table, paying bills with money they don’t have. This certainly suits the purpose of those who can afford television advertisement time, but I must wonder if any of this helps me get through the day or maintain a stable retirement.
 Economics books have failed to instruct me, after finishing most of these tomes I wonder WTF??? I have been spoiled by my formal study of physics, mathematics and other hard science subjects. What I need is the financial equivalent of the Law of Thermodynamics, or Newton’s laws of Motion, clearly stated formulations of a useful nature, knowledge that I could use for earning a respectable living, or maintaining an honorable retirement.

I humbly offer a few Financial Laws and hypothesis using hard science principles.

The First law of economics. Everything is for sale
The Second law of economics. You can’t afford it.

Hypothesis of Monetary Principles.

Money attracts money, the strength of the attraction is calculated by the square of the greed applied, more commonly known as, the rich get richer, the poor get poorer.
It is all luck. The most likely event is the less likeable event.

Explanatory Examples.

1) There is $250 million yacht you would like to own. You can barely afford a picture of the yacht. You switch envy for greed, then start a company selling Global Warming Insurance, collect premiums until the shorelines flood, then you file bankruptcy and sail away on your yacht.
2) The public market place contains approximately 63,000 companies. An unpredictable five will be hugely successful over the next ten years, returning 1,000% on your investment. To improve the odds, you invest in a professionally managed broad based index fund. The fund manager sells the five winning stocks, years too early and "locks in the profits", pays himself a bonus for being so smart, then takes the usual management and transaction fees, which leaves your account negative.
Having proved the propositions I now offer one corollary. Financial success requires morality be confined to Sundays only.

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