The Highly Elastic and Unstable Economic Measure Stick
Sorry I do not write in English, but in NorEnglish, there is no typos in my writing, if you think so there is just a lack of your knowledge in NorEnglish ;-)
Conclusion: Politicians and Central bankers have focused on trying to keep the volatility low and in this way in the long run created excessive Volatility of Volatility that we now probably just have seen the beginning of. (I am not speaking about the volatility as simply standard deviation hear, standard deviation is a flawed measure of volatility, I am talking about fluctuations in a wider sense.).
In most scientific (and even non-scientific) disciplines great progress have only been made possible through defining and developing accurate methods and standards of measuring things. That is accurate measure sticks. In economics we have now for a long period moved in the opposite direction. Economic growth, return on your savings, they pay out on derivatives, present value, and your wealth are all measured in Money. The problem is money have once again (over time) become extremely elastic. The government, the central banks can inflate or contract the FIAT money supply dramatically. The financial institutions can based on today’s system of fractional banking (a very old system indeed) inflate the money supply as long as there are people that will sign their name on a piece of debt-paper. The fractional banking system is more elastic than ever. The fraction behind the fraction is itself highly elastic, in the old times at least the fraction itself was highly stable and close to impossible to duplicate.
The money contraction is often more difficult to control (more stochastic) as it typically consist of contraction the measure stick in one end (the credit contraction from housing bust and financial institutions blowing up) and at the same time expanding the measure stick in the other end (the inflating money supply from rate cuts, liquidity injection, tax rebates etc.).
Having an elastic measure stick is creating confusion and additional wealth transfer and little more. The alternative is not simply trying to create a risk free price system or society, such only exist in the dreams of people that do not understand the physical laws of uncertainty. Everything is uncertain (except where time stands still): risk-free is only something finance professors believe in, gold can only be risk free relative to gold and nothing else, a paper dollar can only be risk free relative to a paper dollar, a green fresh apple picked today is only risk free against a equal green fresh apple picked today in the same location, risk-free hedging is only risk free because it transfer something into dollars (or whatever currency you are looking at) and paper dollars are risk free against paper dollars, paper pounds against paper pounds etc. A fixed price system will only create the illusion of stability in a time period for then to build up pressure that sooner or later will explode into massive volatility. Fixed price systems have to some degree been tried out in throughout history, it was a disaster and always ended in exploding chaos and volatility.
Not long ago central banks all focused on fixed exchange rate policy. It gave extremely low volatility currencies for a long period of time. Then it all felt apart in bursts of massive volatility, in massive interest rate and currency shocks. Then they came up with solution to let exchange rates be highly elastic (good) but also to let measure stick itself be highly partly random partly deterministic. That is the money supply be more elastic than almost any other time in history. This is just another flawed system that worked well for a time (giving illusion of price stability). There is no perfect systems but I am quite sure there is something much better.
My point is that out of whole series of possible money measure stick systems we have today chosen probably one of the most elastic and unstable possible. The society has chosen a partly deterministic partly stochastic measure stick as the very fundamental measure stick for all economic measurements.
Change the definition of a meter or foot into a partly deterministic and stochastic process; does this make your house bigger or smaller? Now think of a such a meter stick that is growing partly randomly in one end and at the same time contracting partly randomly in the other end. Think how frustrating it would be to measure the length of rigid object with such a measure stick, try to construct a house with such a measure stick. Possibly such a meter stick would help you rip of someone in the housing market that not could do calculus as well as you, but the elastic money stick is good enough to accomplish this.
Change the definition of the measure of speed of light (in vacuum) to follow a partly deterministic and partly stochastic process and ask yourself if this will make the GPS system more accurate, and will it help you travel faster?
Today’s money system is a system that gives long periods with illusion of stability that sooner or later turns into massive eruptions of instability and chaos. No matter money system there will always be economic cycles, periods with stability and periods with economic chaos, upturns and downturn. Having an accurate measure stick will however help everyone calculate about where they are and then help more people to take "proper" action based on this. Most people do not have the time to study the elastic money stick in detail, and even people that do so have difficulties measuring economic related activity (for example the central banks themselves with their lagging and limited inflation measures). Elastic measure sticks moving around partly random (deterministic and stochastic) based on inflating (and contracting) the money supply is making the world more chaotic after periods of artificially low volatility (illusion of low risk and price stability) , it transfer wealth both in a deterministic and stochastic way.
Politicians and central bankers have been focusing on volatility (stability in their lagging inflation measures over a short period of time), not volatility of volatility that only will show up over longer periods of time. Central bankers and many academics have possibly tried to developed a more stable economic system. What they probably have created is periods reducing the volatility (giving illusion of stability) that at some point will spill over in massive volatility, they created more volatility of volatility by deciding to use a measure stick that makes it hard for people to measure. They have also created a system with positive partly stochastic drift in the measure-stick (known as inflation). If you not can measure as accurate as actually is possible how can you then make the best decision for the future. We have entered the Age of Turbulence.
More stable moderate volatility is for most humans highly preferably above periods of very low volatility that suddenly explodes into massive volatility and chaos. An illusion of economic stability makes people forget we live in a uncertain world where they need savings. I have little doubt that a rigid money measure stick would create more stable moderate-volatility economic system. To plan the best step ahead you need the most accurate measure stick attainable. This has been important in almost any human progress in almost any other field.
At some point the world (or a parts of it) will probably move forward (or backward) to a much more accurate measure stick of money, even a fully rigid measure stick is potential obtainable, something the world probably never have seen yet. I am not sure it will happen in 1 year, 4 years or 200 years from know, but also the money system will change, it has always done and it will always do. A rigid money measure sticks would give more stable moderate-volatility. That is it would very likely reduce the volatility of volatility over long periods of time).
