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Fed Unveils Headache-Free QE Math

Tyler Durden's picture




 

Submitted by Janet Tavakoli of Tavakoli Structured Finance

Fed Unveils Headache Free QE Math

The Federal Reserve Board We-Hate-Math Committee announced the true purpose behind QE.

Do derivatives confuse you? Do you hate bond math? We feel the same way! So we simplified your life with headache free QE math. Compounded rates, equivalent rates, production functions: who needs old math?

Old Bond Math

You want to invest $100,000 for one year. A too-big-to-fail bank offers an interest rate of 10% per annum with quarterly compounding which reflects the bank’s credit risk without taxpayer support for the financial system.

What is the equivalent rate with continuous compounding? What is the value of your investment after one year rounded to the nearest dollar?

The equivalent rate with continuous compounding = 4 x ln(1 + 0.10/4) = 9.877%. The future value factor is e^0.09877 = 1.103812

The future value of your investment is $110,381.

You may be annoyed that we simplified the calculation by rounding to the nearest dollar; we agree, that was oversimplification, but we love simplicity! And that’s chump change compared to how much you are getting ripped off in our new system.  So with our new math system, there is no need for rounding! In fact, there is no need to ever calculate equivalent yields or compounded rates again!

QE Bond Math

You want to invest $100,000 for one year. A too-big-to-fail bank quotes the taxpayer subsidized interest rate of zero percent per annum with quarterly compounding. Notice that zero rates make compounding irrelevant!

What is the equivalent rate with continuous compounding?  What is the value of your investment after one year?

Your equivalent rate is zero, and e^0 = 1, so your future value factor is 1. What could be easier?

The future value of your investment is $100,000. Unadjusted for inflation, of course!

We did away with inflation calculations, too. It is easy if you do not count food, energy, or healthcare.

Old Math for Economists

You remember the production function:

ƒ(K.L) = ½K^½ x L^½

This represents factory output as a function of capital (K) and labor (L). Let’s solve for the partial derivative of ƒ(K,L) with respect to L.

?ƒ(K,L)/ ?L = ¼K^½ x L^-½

This equation tells us how much production (in the form of factory output) will change when we increase labor and keep capital fixed.

QE Math for Economists

By keeping interest rates at zero, we encourage companies to buy back their own stock and engage in acquisitions instead of using that money for capital spending. The stock market loves it!

We know that with no net increase in capital spending, you can add more labor, but on the margin, it will be less productive, so we’ve eliminated creation of net new full time production jobs!

Also, by keeping interest rates zero, investors in “safe” investments get zero interest, so they are reluctant to spend. There is no need for increased production!

We can eliminate this old math production function entirely!

We keep production, capital, and labor constant and eliminate real growth!

The Genius of the New Math

You may ask when we will raise rates? With real productivity low, why would we raise rates? That’s our story, anyway. Besides, European sovereign debt now trades at negative yields, so in comparison, zero is a windfall for investors! We don’t need to take a step forward when everyone else is willing to take a step back. The new math is safe for the time being.

Bankers and financiers will continue to siphon cash from the productive economy; they will be able to buy more goods and services than savers, taxpayers and voters who could not be bothered to do the math.

Endnote: This is a work of satire, and this is not a press release from the Federal Reserve Bank Board We-Hate-Math Committee.

 

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Sun, 03/08/2015 - 13:03 | 5867046 ParkAveFlasher
ParkAveFlasher's picture

1 whisky, 1 scotch, 1 beer

Sun, 03/08/2015 - 13:08 | 5867063 Headbanger
Headbanger's picture

Yep.. I'm pouring a Gentleman Jack right now ..

https://www.youtube.com/watch?v=--AvCsh48bk

Sun, 03/08/2015 - 13:27 | 5867120 highandwired
highandwired's picture

Math is for idiots.  Smart investors just BTFD!

Sun, 03/08/2015 - 13:53 | 5867184 Headbanger
Headbanger's picture

Oh duh duh duh ...

Sun, 03/08/2015 - 14:15 | 5867236 flacon
flacon's picture

Economists think that by drawing a bunch of greek (yes GREEK as in GREECE) letters on a page separated by lines and squiggles that the average person will think that the economists are super smart and above reproach. The sad truth is that the economists are right in that people will look at those squiggles and shrug, giving all power to the "rocket scientists" to run the people's lives into the ground.

Sun, 03/08/2015 - 14:22 | 5867256 Stoploss
Stoploss's picture

Federal Reserve Bank Board We-Hate-Math Committee.

 

Banners, T-Shirts, hats, coozies, keychains...

 

Sun, 03/08/2015 - 17:37 | 5867724 Nobody For President
Nobody For President's picture

3 California wine

Sun, 03/08/2015 - 13:06 | 5867051 hedgeless_horseman
hedgeless_horseman's picture

 

 

It is fun for me to think about the practical reality and likely outcomes of negative interest rates.

Hedge accordingly.

Sun, 03/08/2015 - 13:06 | 5867059 AmericasCicero
AmericasCicero's picture

Drugs help

Sun, 03/08/2015 - 14:26 | 5867071 hedgeless_horseman
hedgeless_horseman's picture

 

 

Please do a hit of LSD, then read these verses on usury and this article on negative interest rates, then get back to us with your understanding.

 

Blessed are those nations that are addicted to mind-altering chemicals, for only then shall they truly understand reality?

Blessed are those nations that screw their neighbors before their neighbors screw them, for they shall know love?

Blessed are those nations that pay people to borrow money, for they shall see real economic growth?

Blessed are those nations that love money before anything else, for they will be richly rewarded?

Blessed are those nations that subsidize the killing of their own children, for they shall know joy?

Blessed are those nations that consume more than they produce, for they will know abundance?

Blessed are those nations that bomb other nations into submission, for they shall know peace?

Blessed are those nations that mortgage their citizen's future, for they shall have wealth?

Blessed are those nations that do not uphold their own laws, for they will know justice?

Blessed are those nations that spy on their own people, for they shall know security?

Blessed are those nations that debase their currency, for they shall know prosperity?

Blessed are those nations that punish the truth, for they will also reward the lie?

Blessed are those nations that follow moral relativism, for might will make right?

Blessed are those nations that are obese, for they will know good health?

 

Satan is known as the father of lies.

Sun, 03/08/2015 - 17:40 | 5867730 Nobody For President
Nobody For President's picture

HH, Acid is WAY too much for this, even on a mellow Sunday. Holy Shit man - give these kids a break.

Some nice mellow Humboldt whatever and a glass or two of Northern CA wine, and they will be good to go.

 

Sun, 03/08/2015 - 13:05 | 5867054 AmericasCicero
AmericasCicero's picture

Oh good, growth is scary anyways.

Sun, 03/08/2015 - 13:07 | 5867065 no more banksters
no more banksters's picture

Here is the more simple version:

QE = (banksters money)^n

Sun, 03/08/2015 - 13:14 | 5867080 robot07
robot07's picture

For all n > 1, of course

Sun, 03/08/2015 - 13:57 | 5867188 Headbanger
Headbanger's picture

And n < oo

Damned infinity symbol doesn't work

Sun, 03/08/2015 - 16:11 | 5867508 CHX
CHX's picture

Just use  (10!^(10!))! as a possible upper bound.

Sun, 03/08/2015 - 13:55 | 5867189 Headbanger
Headbanger's picture

Except on Tuesdays

Sun, 03/08/2015 - 17:45 | 5867746 Nobody For President
Nobody For President's picture

Oh fuck me hb, that was great!

In joke par excellance...

 

 

 

 


Sun, 03/08/2015 - 13:19 | 5867098 Crash2012
Crash2012's picture

Someone has finally explained 'common core' in terms I can understand!

THNX!

Sun, 03/08/2015 - 14:34 | 5867174 The man with po...
The man with pointy horns's picture

If common core has partial derivatives I will shit a brick. The national curriculum in both the UK and the US keeps getting dumbed down to bolster results, or lower standards so girls can get the same average grades as boys in mathematics and the sciences.

Sun, 03/08/2015 - 13:24 | 5867112 joego1
joego1's picture

Yes it's true, fiat is becoming worthess, the sheeple just haven't noticed that yet. Look out below when they do figure it out!

Sun, 03/08/2015 - 13:31 | 5867130 cigarEngineer
cigarEngineer's picture

I am an engineer, and I approve this math as correct. But what does a partial derivative with respect to one term have to do with anything.

Sun, 03/08/2015 - 14:05 | 5867201 Headbanger
Headbanger's picture

I are an ingineer two.

That equazun don't got partial four pushin on a string neither!

But seriously.. (or not) It's hilarious for the complete stupidity of being a smooth function in the first place and ignoring any "non-linearity" which exist in any system.

Damn!  Where the fuck did that come from!?

More Gentleman Jack should help stop that crap.

But it should be modeled using chaos theory.

Sun, 03/08/2015 - 15:22 | 5867414 grekko
grekko's picture

Chaos Theory?  No!  Just wait a bit, real chaos is coming.  Stack, lock and load.  Pitchforks and torches at the ready line.

Sun, 03/08/2015 - 13:35 | 5867141 Pareto
Pareto's picture

"This equation is obsolete"........it was never relevant to begin with.  Using Roy's identity et al you could bounce around from production function to profit function to cost function - and as cool and convenient as all of that math was, it did little to describe reality.  Mathematical masturbation.

Sun, 03/08/2015 - 15:26 | 5867187 Dekyus
Dekyus's picture

Maths is useless, only insiders information is useful

Sun, 03/08/2015 - 14:15 | 5867233 Ignorance is bliss
Ignorance is bliss's picture

Is that the mathematic equivalent of raping the country? Wadda ya know I Learned something new today. All I need now is a modern army for hire, and to lose my morality and I'll be ready for my new career in oligarchy.

Sun, 03/08/2015 - 15:37 | 5867448 Kirk2NCC1701
Kirk2NCC1701's picture

Pretty simple Calculus, really. It tells me that...

If you keep the Kapital fixed and increase the Labor linearly, the output will increase non-linearly (1/sqrt(L)).

Bullish!

Sun, 03/08/2015 - 15:39 | 5867452 MedicalQuack
MedicalQuack's picture

Oh yes we have full on substantiated Plos One study that the fear of math gives people real physical pain and I used to refer to this study with a little touch of satire, but darn it's really true.  I have recently had a few quants refer to it as well:)  It doesn't get any better than this.

http://ducknetweb.blogspot.com/2012/10/algo-duping-plos-one-journal.html

So this is why are are a nation that is lead around by media distractions, i.e. the Hillary email server:) Ok so watch video #1 at the Killer Algorithms page or you can find it as video #1 in the footer of any of my blog posts "Context is Everything" a video from mathematician Charlie Siefe done a couple years ago at Google's NY headquarters, telling their employees how they get duped with math.  It's very well done and even entertaining.  You will learn that there is no math formula for the perfect butt and he takes apart some of the other crap you hear in the news too.  Pay attention to the end with the Russian nuclear testing questions as right now with Putin this has some interest as the US used bad math back in the Reagan era and it's never been solved.  The US geologists begged Reagan not to go there but he did.

http://www.ducknet.net/attack-of-the-killer-algorithms/

I wrote another opinion post on this topic saying it's time to tear apart some of the proprietary code out there and check it for accuracy.  I used to write software and what a deal when you can compile your code to where nobody ever gets to see it and just rape the heck out of everyone's trust and get everyone to buy in to fake numbers...such a deal.

http://ducknetweb.blogspot.com/2015/03/its-time-to-look-at-some-of-proprietary.html

When it comes to markets and Quant formulas, proprietary code is always up for good conversation is it not?  It's the back bone of front running I could venture to say. 

Sun, 03/08/2015 - 15:52 | 5867482 Clowns on Acid
Clowns on Acid's picture

According to the Fed.. Math can be anything you want it to be as long as the result is

  • Saves the banks from self induiced bankruptcy.
  • Ensures the Banks makes profits enough to pay CEO's and Mgmt teams a minimum of $2.5MM / year. 
  • The Fed keeps control over the lives of the US populus, and ensures that any DEM or maybe REP, politician sings their praises.
Sun, 03/08/2015 - 17:56 | 5867768 Nobody For President
Nobody For President's picture

It is pretty obvious there are a lot of engineer-type geeks here on ZH. Love you all.  I have an MBA, which means I majored in young women, party,extra-curricular actiivities, and business stuff, plus my minors in geology and economics (more or less in that order, except I really enjoyed economics - but not as much asd young women), but I never made it through calculus, though I did well in stat.
Great bunch of posts. Thanks. 

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