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Wednesday, September 26, 2012

The Invisible Fat-Finger and The Phoney Economy

 Swedish Philosopher Nick Bostrom

Adam Smith had his "invisible hand"; we have our barely visible "fat-finger"...

I love being in a Phoney Economy, where everything is an algorithm. It is like living inside a computer simulation at times, where everything resembles "reality", but has a distinct "irreality" about it... sort of like Halo 4.
We used to argue about the question posed many years ago by Nick Bostrom whether we might be living inside a computer simulation... now it seems we are.

For instance:
Are Oil Prices Determined Solely By Fundamentals?

Jim Hamilton on what determines prices in oil markets:
...The Wall Street Journal carried this account last week:
Oil prices dropped more than $3 in less than a minute late in the trading day on Monday, just as trading volume spiked. The move also dragged down prices of gold, copper and even the euro.
"Traders were looking like deer in the headlights," said Peter Donovan, a floor trader... "I called four different desks, and they all said, 'we don't know.' " ...
The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry.
Fat finger or no, there was an even bigger drop on Wednesday...
Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. The minute-by-minute price of a NYMEX contract is determined by how many people are wanting to buy that financial contract and at what price, not by how much gasoline motorists burned in their cars that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?
In one sense, the answer to that question is yes-- last week's decline in the price of crude oil will soon show up as a lower price Americans pay for gasoline. But here's the problem you run into if you try to carry that theory too far. There are at the end of this chain real people who burn real gasoline when they drive real cars. And how much gasoline they burn depends in part on the price they pay-- with a higher price, some people use a little bit less...
 The post continues to establish that there are real classical economical parameters determinant of the price of oil or gas. We are left with a price of Oil = P, and P = Real Demand Price + Speculation Price  (P=RDP+SP), and there is a "malaise feeling" everywhere within reading distance that "SP" has been growing exponentially, while RDP chugs along in a linear fashion.

Speculation Price is to Economics just exactly as Charitable Deduction is to Sermon on the Mount : we have given up our lives to determining factors which are remotely complex, coldly logical, and vastly inhumane by their inhuman scale of application.

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