Replaying 1929!

More Insights from The Mazurok-Ure Correlation

Wings and Small Control Surfaces

The work that Ehor Mazurok and I have been focussed on, the relationship between the cumulative behavior of the rolling mountain of debt in the U.S., triggered some thoughts about how the economy behaves something like an airplane wing. I have no idea where these thoughts from from, mind you, as I was simply laying in bed pondering the universe while waking up Saturday morning when this picture came to mind.....and economy with a wing-like shape and small control surfaces. Fortunately, the concept is pretty simple to grasp but to get you there, especially if you don't have your Air Transport Rating (FAA ATR or CAA equivalents) rating, I need to take you through a quickie course from ground school for pilots.

The first piece of the concept is that the economy, like the wing of an airplane is not a single dimensional "thing". Rather, it is a "ball of stuff" that is kluged together in a not eintirely accidental way that is somewhat three-dimensional (or four-dimensional, if you count movement in time) in nature.

What basic physics teaches us is that the dimensions of an airplane wing cause it to act like a solid object. It has four dimensions that define what it physically "is". These dimensions are length, width, and breadth, that has a fourth dimensional aspect (moving from one place in time to another) and that determines speed of air over the wing..

The behavior of this wing is nearly 100% predictable within boundaries. If you have a wing that's 137 feet wide, say three feet thick, and 15 feet deep, and accelerate it air - right this minute - the wing will develop lift and fly off somewhere. Hopefully, you have attached a fuselage, engines, landing gear, some control surfaces, and a pilot other than me, or you will make a terrible mess somewhere.

The key insight from the Mazurok-Ure Correlation is that in much the same way, the economy behaves in similarly predictable ways given some boundaries, just like the aircraft wing! What's missing from the modern notions of economics is that there's been little explaining done in the popular press, about how the economy may be thought of as a "solid thing" moving through quantum space-time*. All of which wouldn't matter -- except for the rude fact that it is!.

The Mazurok-Ure Correlation suggests that the economy is not just a collection of numbers, but has certain characteristics that are three (or four) dimensional in nature.

You see, when you look at a mortgage, for example, there are three dimensions that come instantly to mind. First, there's the length of a mortgage, then there's the depth (size) of the mortgage, and then there's the height of the mortgage: the interest rate!. The fourth dimension is the duration of the mortgage (time) and in this sense, the mountains of debt today may be conceptualized as icebergs or mountains moving forward through time.

If you want to get some great insights into derivatives, visualize the iceberg of debt, the melt-rates of the layers! But back on point....

Back to Ground School

One of the most interesting parts of learning to fly airplanes, is developing a strong appreciation for the behavior of airplane wings. You learn that by applying small variations of wing dimensions, through controllable surfaces, you can make an airplane do all sorts of things. Rolls, stalls, loops, pukers, and "greased-on" landings.

So it is with the economy: You can make an economy do all sorts of things by changing the dimensions of the debt that makes it up. You can make the economy act as a high-lift device, and grow like crazy. Or, like a wing, you can fly slowly and comfortably.

Wings also have one other critical aspect worthy of consideration. They stall.

I'm going on memory here, but the basic notion of wings developing lift is that when air hits the front of the wing, there are two paths for air to get from the front of the wing to the back. When air is flowing smoothly, air via either path arrives at the back of the wing at the same time.

One way is under the wing and the other way is over the wing. When air hitting about the middle of the wing (near what's called the chord line) goes over the top of the wing, it moves faster than air going under the wing. The air going over the top produces less pressure on the wing's top because of something called the Bernouli effect. The difference between the wing's bottom pressure (high) and top pressure (low) determines lift.

The purposes of control surfaces, flaps, slats, spoilers, and air-brakes, is to change the lift. An aileron (the flappy things on the rear surface of the main wing) increases the wing lift on one side and decreases the lift on the other, and the plane banks. The elevator (the little horizontal wing in the back) pushes the back of the plane up or down, and this changes the angle of attack of the wing (changing the relative wind).

When the angle of attack of the wing exceeds a certain angle (the critical angle of attack), the air that used to be flowing smoothly over the top of the wing (lamilar air flow) becomes turbulent and the wing loses lift. This is called a "stall". By the proper application of control surfaces, a pilot can either a) recover from the stall of b) crash.

OK, so much for ground school. What the hell does all this have to do with the economy, you're asking yourself?

The economy, may be thought of like a wing. Through policy, government can change the charateristics of the wing, and here's where mortgage rates and the notion of lift gets interesting.

Now, unlike a wing, that is slick and graceful in form, the economy is more like an iceberg floating around. It's got all kinds of jagged edges to it and it doesn't fly quickly, but it's behavior is still subject to influence through certain control surfaces. Interest rates are one control

If the depth of the wing changes enough, at a given airspeed, the wing will stall. This is what happens when surfaces of a wing become covered with ice. The airflow changes and the plane needs to fly faster and faster with less and less angle of attack, or it stalls. You see where this is going?

In the economy, as as debt builds up, the economy has to move faster and faster to stay even. Debt load, like ice loading, causes a lack of lift. Beyond certain limits, debt is to the economy, what ice is to a wing. The Fed's moves are designed to keep the wing flying.

Debt is continuing to build up on the economic wing, and we're losing lift!

By lowering the interest rate, they have effectively tried to reduce the icing on the wing. The problem the Fed faces though, is that a change in interest rates today is a very small control surface on the "wing of debt" that has taken nearly 70 years to develop.

Unfotunately, the Mazurok-Ure Correlation suggests that no matter what the Fed does, there are some natural boundaries for cyclical behavor of the economy that not even Mr, Greenspan will be able to change. Like the ice building up on the wing, the ice is building up faster than the Fed can reduce altitude and get down to where the air is warm.

Going back to Biblical times and the Book of Leviticus, through 1929, the length of the cycle that it took the "wing to stop flying" was about 56.6 years. This time around, a skillful pilot with a vastly expanded set of "co-pilots and navigators" (the Fed research teams) and modified control surfaces, have been able to engineer "flight" for 70 years.

That's a darn impressive record - in fact - one could could say that government has learned a little something about flying. But that's the end of the good news.

The ice (compounding of debt on top of debt) will continue to build no matter how skilfull the pilot and crew area. We're in the area where the diminishing angle of attack will necessitate a recession or worse.

Unlike Great Depressions, which wipe out huge portions of debt, and allow the 50 to 100 year cycle to start afresh, simple recession doesn't do the trick. So, as Kondratieff told Stalin in 1926, the West will have a Depression, but will rise again.

The problem the "Chief Pilot" at the Fed faces is whether he can get the wing down fast enough (and a 1% cut ain't gonna do it) to land, or whether the economy's rate of descent will be such that we get a fiery crash.

The Aggregate Index work suggests that the Fed policies have prevented the blow off spike that happened in '29 at the peak. And, the course of the chart suggests that the magnitude of the crash might not be as great as 1929. If this is the case, we might see an ultimate Dow level at about 3,500 instead of 1,200.

For the period now through May, I'm short and closely watching the pilot trying to line up the runway under what are very difficult weather conditions. Problems like derivatives are bound to cause control problems, as they did with LTCM and will continue to do so till we're on the ground.

So keep your tray tables in the upright and locked position and make sure your investments are safely stored under the seat in front of you. Good pilot or not, this will be a rough landing.

We watched a movie Friday night, "Maverick - The Lazy Ace" (James Garner, 1981) and the best lines in the move was when the old codger at the Miller Place who said to Maverick: "Gambler? Gamblers is only two steps above bankers".

Be sure to Visit:

Treasury's Office of the Public Debt (Click here to get there): These folks in Treasury are one of the last bastions of candor in the federal government!

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All contents (c) 1998-2001 by George A. Ure, MBA, except authors as linked or noted