Why the us Federal Reserve is Impotent

September 17, 2002

Most people will be surprised to discover (as I was) that the long "Kondrat'eff Wave" about which so much has been written is less an Economic phenomenon than it is a Biological phenomenon. References to the K Wave "seasons" are really focusing on a symptomatic state, within a recurring cycle, of two interrelated macro organisms which exist symbiotically with each other. These two macro-organisms are the Ecological Environment on one hand, and Human Society on the other.

At face value this thought is as difficult to understand as it is to accept, so some explanation is necessary.

In 1985 it was demonstrated by an Engineer/Scientist by the name of Cesare Marchetti, using rigorous mathematical techniques, that there is a close correlation between the rate of market penetration of an "energy wave", and the emergence of a group of related technologies. In an article published by him in the New Scientist (May 2nd, 1985) entitled "Swings, cycles and the global economy" he demonstrated with elegant precision that when the new energy related technologies reach "critical mass" they gain the ability to have a meaningful impact on the economy.

The next commercially important energy source will be Natural Gas. That this is so was mathematically validated by him to a degree of confidence that is approaching certainty. In fact, Natural Gas emerged as a commercially relevant source of energy almost 10 years ago (1993).

It is fascinating to contemplate that the mathematical models which Marchetti used to arrive at his conclusions regarding the ebb and flow of "energy waves" were based on the "Volterra-Lottke" equations. Why is this so?

The Volterra-Lottke equations were originally developed in the 1920s to model the ebb and flow of communities of prey and predator, for example, buck and wolves in a forest. The wolf population feeds off the buck population. As the wolf population grows, the buck population diminishes - to the point where it is no longer able to sustain the wolf population, which starts to die out. A shrinking wolf population enables the buck population to regenerate, until the cycle starts again.

Marchetti : "My hunch was that I could visualise primary sources of energy as species competing for a niche, the energy market. And so I attempted to analyse the changing pattern of energy use in those terms. The result was striking. A set of logistic solutions of the Volterra-Lottke equations fits perfectly the evolution of that competition for more than a hundred years."

Having proven the predictability of energy wave emergence, Marchetti then set about examining the correlation between this phenomenon and the emergence of "bunches" of innovations as represented by numbers of patent registrations. What he discovered here was that the median point of these bunches occur with an equally predictable periodicity.

Marchetti again: "The beat pulsates! It has a period of 55 years …." "It brings us one step nearer to solving our problem of the long recession and its evolution"

Marchetti's discovery offers one of those rare moments of epiphany. To quote William Shakespeare's Hamlet: "There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy".

That the relevant Natural Gas associated technologies have not yet become sufficiently commercially robust to be capable of "driving" the world economy is - in my view - a direct result of the USA Government's failure to ratify the Kyoto Protocols. i.e. The failure of the US Government in this regard has actually inhibited and delayed the Natural order of things. Why?

This short sighted decision has stifled market demand for the new technologies (predominantly Fuel Cell and Superconductor associated) because ratification of the Kyoto Protocols would have been a catalyst for change in market behaviour, world-wide - but in particular within the USA economy. In addition to having the world's largest economy, the USA is also the world's largest producer of the Greenhouse Gases that the Kyoto Protocols sought to reduce over time.

With the above as background, it is clear that any attempts by the US Federal Reserve to "manage" economic cycles by managing interest rates and money supply are doomed to failure. The Federal Reserve is attempting to manage issues which are not the ultimate drivers of the economy. All that happens when we loosen or tighten money supply is we defer the eventual prevalence of biologically driven economic forces, and we exaggerate the eventual fall-out in the process.

Credit creation and tightening does not grease the wheels of the economy, it effectively duplicates on a macro scale what "uppers" and "downers" do on a micro scale , namely to stimulate and slow down the metabolic rate of an individual's body. As we all know, this has the potential to eventually cause the body to suffer a breakdown which either kills the patient or forces the patient into de-tox.

In the end analysis, there is no substitute for healthy living, and one cannot cheat death. That the economy will ebb and flow with a precision similar to the Earth's revolution around the Sun is a foregone conclusion, and the best we can do is to avoid taking action which will exacerbate the consequences - both at the top and at the bottom of the cycle.

And that, ultimately, is why Gold Standard makes such objective sense. A Gold standard will provide an external discipline that will "block" the stupidity that we have been witnessing since 1982, when Ronald Reagan's advisers took a conscious decision to stimulate international trade by means of deficit spending.

A picture is worth a thousand words. Here is a very relevant picture, reproduced from a recently published Gold Eagle. article. Follow the chart from 1982 to see where the Reagan era decision took us.

Interference by the Fed gave rise to an unusually hot Summer. A consequence is that we are now facing an unusually cold Winter of similar proportions.

Finally, one glaringly obvious constructive action that the US Government could take would be to ratify the Kyoto Protocols. Instead, Mr George W Bush appears to be focusing on War as an economic option.

Which begs the ultimate question: "Why is the US Electorate prepared to accept such sub-optimal decision making from its elected leaders?"

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.