OBJECTIVES 1. Create an approximate mathematical macroeconomic model for developed economies like United States based both on Economic Fundamentals, and Game Theory. 2. Simulate this Mathematical Model in Excel to predict major outcomes possible for developed economies like United States. MODEL PREDICTIONS FOR FIXED CONSUMPTION : Inflation Rate will reach 50% in just 4 years & Hyperinflation will hit within a decade. FOR AUSTERITY: Society will get poorer & we will still have high inflation.
1. INFLATION PREDICTIONS BASED ON GAME
THEORY MODEL
TABLE OF CONTENTS
Author.......................................................................................................................................................................2
Month of Publication..................................................................................................................................................2
Objectives and Scope..................................................................................................................................................2
Objectives...............................................................................................................................................................2
Non-Objectives .......................................................................................................................................................2
Economic Fundamentals.............................................................................................................................................2
Model Principles.........................................................................................................................................................3
Model Assumptions for Next 10 Years..........................................................................................................................4
Model Tuningfor United States...................................................................................................................................7
Variable Names for Tuning Data...............................................................................................................................7
Tuning Data Source and Data...................................................................................................................................7
Model TuningAssumptions......................................................................................................................................7
Model Tuning Mathematics.........................................................................................................................................8
Model Constants.....................................................................................................................................................8
Variables.................................................................................................................................................................8
Model TuningVariables...........................................................................................................................................8
Model Tuning Equations FromAccompanying Excel Sheet.........................................................................................9
TuningProcess........................................................................................................................................................9
Model Tuning Results..............................................................................................................................................9
Using Model for Predictions........................................................................................................................................9
Case 1: Fixed Consumption......................................................................................................................................9
Constants for this Case ......................................................................................................................................10
Equations for this Case ......................................................................................................................................10
Case 2: Austerity ...................................................................................................................................................10
Constants for this Case ......................................................................................................................................10
Equations for this Case ......................................................................................................................................10
Model Predictions ....................................................................................................................................................11
For Fixed Consumption..........................................................................................................................................11
For Austerity.........................................................................................................................................................11
The Middle Path....................................................................................................................................................12
2. Appendix..................................................................................................................................................................12
Attached excel Sheet.............................................................................................................................................12
Excel Calculation Table for Fixed Consumption........................................................................................................12
TuningParameters............................................................................................................................................12
Numerical Results..............................................................................................................................................13
Excel Calculation Table for Austerity Case...............................................................................................................13
TuningParameters............................................................................................................................................13
Numerical Results..............................................................................................................................................13
AUTHOR
ďˇ Alias:Leo1992
ďˇ Email:leoleo1992@protonmail.com
MONTH OF PUBLICATION
Decemberof 2021
OBJECTIVES AND SCOPE
OBJECTIVES
1. Create an approximate mathematical macroeconomicmodel fordevelopedeconomieslike UnitedStatesbased
bothon EconomicFundamentals, andGame Theory.
2. Simulate thisMathematical Model inExcel topredictmajoroutcomespossiblefordevelopedeconomieslike
UnitedStates.
NON-OBJECTIVES
1. The model isfor whole economy.There isnoattempttomodel individual sectorsorcompanies.
ECONOMIC FUNDAMENTALS
Thissectionreiteratessome fundamental rulesof economythatare usedto buildthe model
1. Moneycan onlybe createdbydoingwork.Thiswork can create goodsor servicesthatare valuable,andmoney
representsthisvalue.
a. Governmentandfed can onlyprintthe currency,buttheycannot printreal moneythatis backedby
goodsand services.
b. Printingcurrencydoesnotbyitself create more goodsandservicesforpeople toconsume.
c. Actual productivityisthe creationof money(value) andnotthe printingof currency.
d. Alsoprintingcurrencyisveryeasytodaybecause governmentsdonâtreallyhavetothe printcurrency
notes,theyjustpressa buttonto generate numbersinadatabase andcreateddata filesforTreasuries.
2. Central Bankis notall powerful andthe Governmentisnotall powerful aswell.
a. Both Central Banksandgovernmentruntreasurydepartmentscannotcreate real money.
3. b. Whena governmentissuestreasuries,itcreateddebtthatissupposedtobe paidback bythe hard work
of all itstaxpayers.
c. Governmenthaspowertocollectmoneyastaxesand redistribute itunequallythroughitsown
spending.
d. Currencyspentbya governmentcanbe currencyearnedbyothernon-governmententities.
3. Central Banksand Governmentshave repeatedlybeenproven wrongontheireconomicpredictions
a. Despite all theirexpertise,boththeseentitieshave notbeenable topredictthe type,nature andscale
of majoreconomiccrisis,time andagain.
b. As theyhave beencaughtunaware,theyhave respondedbyprintingcurrencytomitigate the crisis.
c. These entitieshave notbeenable togetthe economytoa state where theycanhandle the nextcrisis
withoutprintingmore currencyagain.
4. Financial Investmentsbringprosperityonlywhenthe activityinvestedinisproductive andcreatesreal value.
a. Investmentsrequire someonetotake money,use ittobuy resourcesandlaborto create something
valuable tosell itformore money.
5. Bondsand stocksare productive investmentswhen
a. Theyare usedto raise moneytofundproductive activitiesthatcreate more value thatwhatwasfunded.
6. If the moneyraisedfromBondsandStocksis usedto fundactivitiesthatisnotcreatingmore value,these
investmentsbecome counterproductive andlose real money.
7. Real estate isa productive investmentwhen
a. A specificareadevelopsbecausenew businessesenablepeople tobe more productive.Thisareathen
becomesmore desirabledue tobetteropportunitiescausingpeople towanttomove there.
b. A house mayalsoappreciate byvalue basedonSupplyand Demandif the numberof housesinan area
are limitedandthe overall productivityof the areagoesup(i.e.the productof numberof people inthe
area and the average productivityperpersoninthe area).
c. Buildinghousesisaproductive activityashousesprovide shelter.Similarlyremodelinghousesis
productive againif itimprovesthe qualityof shelter.
8. If the above doesnothold,a house isnormallynotaninvestmentbecausehousesbythemselvesare not
productive.Housesdonâtgrowbythemselvesand dorequire maintenance.
a. House pricescan still inflate incurrencydue tocurrencyprintinglike everyotherassetandcommodity
and so housescanbe a hedge againstinflation.
9. Printingcurrenciesoftencausesinflation
a. Whena governmentprintscurrencythatisnot backedby real goodsand services,the amountof
currencythat chasesthese goodsandservicescanincrease while the latterremainsthe same.Thiscan
cause inflation.
b. As the governmentcontrolsdistributionsof thiscurrency,theycandirectit to targetspecificsectorsso
that the goodsand servicesfromthese sectorsinflate more thanothers.
10. GovernmentsandCentral Bankscan create currencyintwo forms
a. Governmentscancreate treasuriesthatdirectlyincreasethe debtandbringsmore currencyinto
circulation.
b. Central Bankscan buy treasuries,Mortgage-BackedSecurities,Bonds,Stocksandanyotherassetsby
printingreservesoutof thinair.Thisresultsinmore liquidityasnow financial entitiescanlendmore
currencyto buy assetsandotherbusinessescanborrow more currencyat artificiallylowinterestrates.
MODEL PRINCIPLES
4. Thissectionlaysouta setof principlesonwhichthe model isbased.Some of these principlesare basedonandcurrent
and historical trends.Othersassume that all entitieswillcontinuetoworkintheirownbestinterestlike isassumedin
othermodelsbasedonGame Theory.
1. In currentFinancial System,there shouldalwaysbe sufficientcollateral informof assetstomathematically
justifythe debtinthe balance sheetsof entitiesatmacroeconomiclevel.
a. Balance sheetsare accountedforin currenciesandnotin real money.
b. CurrencyinflationthatraisesAssetvaluesandnotthe Debtcan helpbalance the Balance Sheetsof
otherwise insolventcompanies
2. If debtin balance sheetof large financial entitiesishigh,the Governmentwill ensure thatBigInvestorsdonât
lose moneyirrespectiveof the state of economytoprotectassetcollateral
a. These investmentsinclude stock,bond,treasuries,andreal estate.
b. Big investorsare smart,andhence lookat the real moneyearnedoveractual currencyinflationto
determine if theyare makingmoneyorlosingit.The governmentknowsthis.
c. Thisis because,if biginvestorswalkawayfromthese investments,the pricesof these investmentswill
collapse.However,inmanycases,these veryinvestmentsshow upasassetsinbalance sheetsof large
financial entitiesandare usedas collateral.So,adrop inpricesof these assetswouldmake these large
financial entitiesinsolvent.
3. To ensure biginvestorsdonâtlose moneyinanenvironmentwhereeconomyisnotdoingwell,Governmentwill
have to playa Zero-Sumgame of transferringsome wealthtobiginvestors
a. The simplestmethodof doingthisisusingCentral BankstobuyAssets normallyheldbybiginvestorslike
TreasuriesandMortgage-BackedSecuritiestopumpupthe price of these Assets.
b. Thisalsoartificiallyreducesinterestrates(yields) thatresultsinmore liquiditythatcango intobuying
more assetslike Commercial andResidential Real estate andStockstherebyraisingthe pricesof these
assetsas well toagaincompensate the biginvestors.
4. All governmentsandcentral banksmeasure GDPintheirowncurrencyunitandnot as a measure of real
productivityandthismay not alwaysbe accurate.For Example:
a. Suppose anauto companymanufacturesandsells1,000,000 unitsof a specificcarmodel for$40,000 in
one year,and then,nextyearitmanufacturesandsellsonly900,000 unitsof identical carsat $50,000.
So total salesinfirstyearis $40 Billionandinthe secondyearis $45 Billion.
b. Real productivityof thiscar companymaybe measuredincar unitsas theywere nearlyidentical and
hence decreasedby10%.
c. Accordingto the governmentstatistics,there wouldonlybe a4% netinflationcorrectiontoGDPand
GDP contributionof car companywouldgrow by 12.5% - 4% = 8.5%.
d. Stock analystsmaypredictthatthe car companyâsrevenuesgrew by12.5% and hence the stock price
can go up by â50%â insecondyearafteraccounting for future growthpossibilities.
e. Similarly,whenyougetabasic Haircut for$15 inone year andget the same haircut nextyearfor$25,
GDP wouldgrowsignificantlyevenwhenthere wasnogrowthinactual productivity(asitwasan
equivalenthaircut!).
MODEL ASSUMPTIONS FOR NEXT 10 YEARS
Thismodel onlyattemptstopredictdatafor next10 yearsand assumesthatthe followingwill holdvalidforthese 10
years.
1. Interestrateswouldneverrise above real inflationrate ashasbeenthe trendfor last10+ years.
5. a. HighInterestRates=> HighCost of ServicingDebt=> Bankruptcies=> AssetPrice crash=> Not enough
Collateral inBalance Sheet=>Financial MarketCrash=> Big InvestorsLose Moneythatis notallowedas
statedabove.
b. To avoidHyperinflation throughJawboning,the central bankswouldkeeppretendingthattheywould
beginraisingratesinfuture butwouldyieldonfirstmarkettantrumfromanyuncertainty.
2. These artificiallyloweredinterestrateswouldresultinthe assetpricestogetdistorted
a. To maintainlowinterestrates,Central bankswill have tobuyTreasuriesandMortgage-backed
securitiesandattimesevencorporate andmunicipal bonds.
b. The abilitytotake a large amountof debtat negative real interestrate will resultinissuingof bonds and
treasuriestocreate significantliquidity.
c. In an environmentwhere Productivityisnotincreasing,mostof thisliquiditywill chase bothphysical
and financial assetstherebyresultinginassetprice inflation.
3. DistortedAssetPriceswill hurtProductivity
a. Higherhouse pricesandhigherRentsthatwill resultinincrease inwagesthatwouldresultinhighercost
of Production.
b. Thisartificiallyhighercostof Productionwouldresultinlackof competitivenessforlow margin
businessesthatwouldhave toclose.
c. As these once profitablebusinesseswillclose,jobopportunitiesinproductivesectorswillreduce and
thiswill hurtnetproductivity.
d. There may alsobe significantdemotivationashigherpercentage of populationrealizesthattheir
significanthardworkisno longersufficienttosustainadecentlifestyle.
4. Consumptionof goodsandserviceswillremainthe same inreal terms
a. Developedeconomieswillpreventconsumptionof actual goodsandServicesfromfallingforboth
Economicand Political reasons.
i. Economicreason:Drop inConsumption=>Drop in GDP => Drop inProfitability=>Big Investors
Lose Money thatis not allowedasstatedabove.
ii. Political reason:Topreventlivingstandardsof General Populationfromdegradingrapidlyas
that can cause political unrest.
b. As productivityisnotincreasingandinflationcanrun high,itwouldbe hardto evenmaintainnet
consumptioninreal terms.However,thismodel assumesthatthe lossinconsumptionbygeneral
populationwillbe offsetbyextravagance frombiginvestorswhoexperience wealtheffectthrough
distortedAssetPricesandhence the netreal consumptionwouldremainsteady.
5. Real Inflationwillrise significantlyindevelopedeconomies
a. As productivitywill getreduced,tomaintainconsumption,developedeconomieswill resorttoissuing
treasurestopay for expenses.
b. As thislargeramountof currency unitschase a smallernumberof goodsandservices,the pricesof
these goodsandserviceswill rise significantly.
6. GovernmentsandCentral Banksof developedeconomieswill be forcedtoplayaZero-Sumgame and must
compensate biginvestorsforall the currencyprinting
a. All biginvestorsholdingBonds,StocksandReal Estate will demandapositivereal returnfromtheir
investments.
b. For thisan ever-increasingshare of printedcurrencymustbe divertedtowardsinflatingassetsheldby
biginvestors.Thisamountmustbe highenoughtoinflate these assetshigherthanthe inflationof
currency.
7. The model assumesthatall thisinflationcompensationtoBigInvestorswouldbe providedthroughcentral
banksbuyingassets.
6. a. The model alsoassumesthattodaythisis the onlymoneythatis goingintoinflatingassetvalues.
8. The model assumesthatbiginvestorsare smartenoughto demandinflationcompensationintermsof cash
inflowstotheirinvestmentsasagainstassetinflationincurrency.
a. Cash inflowsandprice doesnothave adirectcorrelation,andina bubble phase,assetvaluationscan
inflate five timesthe amountof the CashInflow.Fore.g.If a companyhas a total 100 sharesand Last
tradedshare value was$10 givingittotal Market Cap of $1000. Now if an investorbuys20 sharesof this
companyat $11, the total cash inflow is20 x ($11 - $10) = $20. However,these orderspushthe total
marketcapitalizationof thisshare to$11 x 100 = $1100 that ishigherthanpreviousvalue by$100.
Hence inthisexample a$20 cash inflow hasresultedin$100 increase intotal valuation,thatis5X of the
cash inflow.
9. The model assumesthatdecrease in productivityindevelopedeconomiesisafunctionof the following:
a. Distortionof assetprices:Higherassetpricesleadtohighercostof labor that will make businessesnon
profitable resultinginoutsourcingof jobstodevelopingeconomies.Thiswould hurtproductivityof
developedeconomies.Thismodelassumesthatthe decrease inproductivityinthisspecificenvironment
will be directlyproportional toDistortionof assetpricesintermsof real money.
b. Decrease incapital that isusedforoperating expensesinproductive businesses:Asprofitsfromcore
businessesandlaborreduce,more capital will be puttowardsspeculatingininflatedfinancialassets
(e.g.BuyingstocksusingmarginthroughRobinhood,buyingandflippinghousesetc.) causinglesser
capital for use as operatingexpensesinproductivebusinesses.Asthisishardto calculate byitself,this
model will assume thatthisiscapturedinproductivitychange w.r.t.distortioninAssetprices.
c. Futilityof labor:Asqualityof life between beingemployedandunemployedgetsnarrower,manyfolks
may tendto optfor latter.Asthisis hard tocalculate by itself,thismodel will assumethatthisis
capturedinproductivitychange w.r.t.distortioninAssetprices.
10. The model alsoassumesthatCentral Banksof developedeconomieswill neverbe able toreduce theirbalance
sheetsizes
a. Most corporatesprefertouse cash forshare buybacksinsteadof keepingitasbufferforrainydays.Only
feware reinvestingthiscashtogrow theircore business.
b. There will be some orotherform of recurringfinancial stressinthe overleveragedfinancialsystemthat
lackssavingsas buffers.So,toprotectthe systemfromimplodingdue tolackof collateral,central banks
and governmentswill keepresortingback tomoneyprintingtosave majorentitiesandcutlossesof big
investors.
c. Central bankshave beenrepeatedlywrongonwhentheywouldreduce balance sheetsandstart
increasinginterestrates.Thiswouldnotchange andwhile central bankswillkeepplanningthese actions
for nearfuture,theywouldneverbe able toincrease interestratesabove real rate of inflation.
11. Populationanditsdemographicswill notchange significantlytocause anyeffectonthismodel.
12. There will be nomajorinnovation/ discoverythatcansignificantlychange humanproductivity.Examplesof
such majorinnovationsanddiscoveriesfromhistoryare Wheel,Fire,Agriculture,Metals,Steam/ICEngines,
Electricity,Crude Oil,Polymers,Petrochemicals,NuclearPower,GreenRevolution,Electronics,
Computers/Smartphones,Internetetc.
13. Major Global Currencieswill inflateinternationallyinasynchronized/linkedmanner
a. While manydevelopedeconomieswill become netimportersdue toreducedproductivity,still their
combinedmilitarymightwillpreventtheircurrenciesfromcollapsingastheywill still control exportof
Energy(Crude Oil,LNG,NuclearFuel) andwill alsobe able tomaintaincontrol oncore technologies.
b. Countriesthatare net exporterof goodscanstill claimsupplychainshortagesandhigherinputcosts
and use themto raise prices.Theircurrencieswill notappreciate astheyneedtoconsume energyand
technologyatinflatedcost.
7. c. As productionandmanufacturingindevelopedeconomieswill remaininfeasibledue todistortedasset
prices,theywill have toacceptthisprice rise fromnetexportercountries.
MODEL TUNING FOR UNITED STATES
VARIABLE NAMES FOR TUNING DATA
Name Description
TW Total HouseholdWealthassummationof all Assetsminusall Liabilities.Here all Assetsinclude
financial assetslikeCommercial andResidential Real estate,Stocks,Commodities,Treasuries,MBS
and variousbonds.
GDP Gross DomesticProductof a Quarter,also the total Consumptionof GoodsandServices
TD Total Federal GovernmentDebt,alsothe Total OutstandingTreasury+CashValuation
TGA Cash heldbyFederal Government
BS Total Balance Sheetof Central Bank
TUNING DATA SOURCE AND DATA
All figuresbeloware inBillionsof Dollars.
Year Quarter Quarterly GDP TD TGA BS TW
Source -> GDP Source TD Source TGA Source BS Source TW Source
2018 Q3 $5,188 $21,516 $368 $4,175 $108,000
2018 Q4 $5,283 $21,974 $380 $4,058 $104,330
2019 Q1 $5,117 $22,028 $310 $3,969 $110,113
2019 Q2 $5,345 $22,023 $245 $3,813 $112,461
2019 Q3 $5,398 $22,719 $335 $3,946 $113,171
2019 Q4 $5,513 $23,201 $383 $4,174 $116,814
2020 Q1 $5,224 $23,687 $429 $5,812 $110,586
2020 Q2 $4,877 $26,477 $1,658 $7,009 $118,585
2020 Q3 $5,302 $26,945 $1,697 $7,075 $122,911
2020 Q4 $5,490 $27,748 $1,669 $7,335 $130,916
2021 Q1 $5,368 $28,133 $1,010 $7,709 $136,206
2021 Q2 $5,712 $28,529 $753 $8,098 $142,347
2021 Q3 $5,819 $28,429 $136 $8,464 $144,709
MODEL TUNING ASSUMPTIONS
1. We usedthe above available dataforQ3 2018 to Q3 2021 forthistuning.
2. The total Productivityof US Peakedin2019 Q2 before COVID19 and TaperTantrum that causedUS Fed to start
increasingitsbalance sheetagain.
3. US Productivityfell duringLockdownsdue toCOVID19 and Unemploymentsoared,andlaborparticipationrates
decreased.
4. So,this model assumesthatthe Actual Total HouseholdWealthof UShas notincreasedfrom2019 Q2 to 2021
Q3 andthe increase inTotal HouseholdWealthof USintermsof USD is a resultof Assetinflation.
8. 5. Furtherthismodel alsoassumesthatTotal Inflationof USDcurrency matchesAssetInflationandhence the
actual inflationcompensatedvalueforfinancial datalike GDPcanbe obtainedbyaccountingforassetinflation.
6. For more assumptions,see Model Constantsbelow.
MODEL TUNING MATHEMATICS
MODEL CONSTANTS
Name Value Details
C_TP 50% Thisis the fractionof PrintedCurrencythatis usedforConsumption.Thismodelassumes
that exactly50% of all PrintedCurrencyisusedforConsumptioninthe same Quarter.
C_MTP 20% As Assumedbythe model,thisisthe fractionof 2019 Q2 Productivitythatwill notbe
affectedbyAssetInflation.
VARIABLES
Name Description
TW Total HouseholdWealthassummationof all Assetsminusall Liabilities.Here all Assetsinclude
financial assetslikeCommercial andResidential Real estate,Stocks,Commodities,Treasuries,
MBS andvariousbonds.
GDP Gross DomesticProductof a Quarter alsothe total Consumptionof GoodsandServices
TD Total Federal GovernmentDebtalsothe Total OutstandingTreasuryValuation
TGA Cash heldbyFederal Government
BS Total Balance Sheetof Central Bank
TP Total productionof Goodsand ServicesinaQuarter
â<VariableName> Whena variable isprecededby â,itrepresentschange inRespective Variableoverlastquarter.
e.g.âTW, âBS
TDS Total DebtSpendinginaQuarter,Measuredas âTD - âTGA.
TIC Total Increase inCurrencyUnits,measuredasTDS + âBS
AINR Actual AssetInflationrate asmeasuredinTW/(TWon 2019 Q2) - 1.
<VariableName>â Whena variable issucceededby â,itrepresentsitrepresentsActual variablevalue correctedfor
inflationbyusingAINRasbase.e.g.GDPâ,TDâ, TGAâ,BSâ,TWâ, TPâ
M_TPâ ModeledTPâbyTuningrespective TuningVariablesasgivenbelow
TD/GDP Federal GovernmentDebttoGDP ratio
MODEL TUNING VARIABLES
The followingVariableswere derivedfromModel tuningforuse inFuture Predictions
Name Details
TV_TW The ratio for cumulative increase inTotal HouseholdWealthtocumulativeincreaseinCurrency
Unitsover lastcouple of years.Thisratiois proportional toratioof AssetInflationtocashinflows
towardsthese assetsdue toincrease inCurrencyunits.We calculate the average forlast4 quarters
and use itfor predictions.
TV_BS The ratio for cumulative increase Central Bankbalance sheettocumulativeGovernmentDept
Spendingoverlastcouple of years.The ratiorepresentsthe InflationCompensationgiven tobig
investors.We calculate the average forlast4 quartersand use itfor predictions.
9. TV_TP The ratio of AINRby whichthe Inflationcompensatedproductivity(TPâ) isreduceddue to
distortionof AssetPrices.
MODEL TUNING EQUATIONS FROM ACCOMPANYING EXCEL SHEET
1. TDS = âTD - âTGA
2. TIC = TDS + âBS
3. TP = GDP - (TIC* C_TP)
4. AINR= TW / TW(2019 Q2) â 1
5. TV_TW = ââTW / âTIC
6. TV_BS = ââBS / âTDS
7. GDPâ = GDP / (1 + AINR)
8. TDâ = TD / (1 + AINR)
9. TGAâ = TGA / (1 + AINR)
10. BSâ = BS / (1 + AINR)
11. TWâ = TW / (1 + AINR)
12. TPâ = TP / (1 + AINR)
13. M_TPâ = TPâ(2019 Q2) * (C_MTP + (1 - C_MPT) / (1 + AINR(Last Quarter) * TV_TP))
TUNING PROCESS
1. TV_TP ischangedby Goal SeekingtosetM_TPâ value same asTPâ for 2021 Q3.
2. For TV_TW and TV_BS,averagesare takenforlast 4 years.
MODEL TUNING RESULTS
1. For last9 quartersfrom2019 Q2 to 2021 Q3, whenassumingthatUS as a whole didnotreallygetwealthierin
termsof actual goodsand servicesdue toCovid19 pandemic,the combinednetassetinflationrate comesto
~28.7%. So, the average annual compoundednetassetinflationforlast9 quartershas been 11.8% per year.
2. US QuarterlyGDP (aka Consumption) inactual termspeakedin2019 Q2 and is still 15.4% belowthat value asof
2021 Q3.
3. US QuarterlyProductivityinactual termspeakedin2019 Q2 and isstill 22.5% belowthat value asof 2021 Q3.
4. TV_BS ~= 74%.
5. TV_TW ~= 268%
6. TV_TP ~= 147%
USING MODEL FOR PREDICTIONS
Itâshard to accuratelypredicthowmuch stimulusandspendingwillhappenovernextone decade.So,tosimpli fythis,
we will considertwobordercasesthatwill helpusdefinethe range foractual outcome that isexpectedtobe within
these bordercases.
CASE 1: FIXED CONSUMPTION
1. For thiscase,we will assume governmentwill spendenoughmoneytoensure thatnet consumptioninreal term
remainsconstantas productivitydrops.
2. While thismeansthatGDP inreal termswill holdsteady,livingstandardsforsome insocietymaystill gohigher
at the expenseof livingstandardsforothersgoinglower.
3. Thiscase isrepresentedinaccompanyingExcel WorkbookinWorksheetwithname âFixedConsumptionâ.
10. CONSTANTS FOR THIS CASE
1. GDPâ = 4,535 billionUSD
2. TV_TP = 137%
3. TV_TW = 271%
4. TV_BS = 74%
5. TGA = 136 billion(Made Constantforease)
6. âTGA = 0
EQUATIONS FOR THIS CASE
1. M_TPâ = TPâ(2019 Q2) * (C_MTP + (1 - C_MPT) / (1 + AINR(Last Quarter) * TV_TP))
2. TP = M_TPâ * (1 + AINR(Last Quarter))
3. GDP = GDPâ * (1 + AINR(Last Quarter))
4. TIC = (GDP â TP) / C_TP
5. TDS = TIC / (1+ TV_TW)
6. âBS = TIC * TV_TW / (1+ TV_TW)
7. âTW = TV_TW * TIC
8. âTD = TDS (asâTGA = 0)
9. AINR= TW / TW(2019 Q2) â 1
10. GDPâ = GDP / (1 + AINR)
11. TDâ = TD / (1 + AINR)
12. TGAâ = TGA / (1 + AINR)
13. BSâ = BS / (1 + AINR)
14. TWâ = TW / (1 + AINR)
CASE 2: AUSTERITY
1. For thiscase,we will assume thatgovernmentwill preferAusterityandwillletthe netconsumptiondecreasein
real term as productivitydropstoreduce the rate at whichdebtgrows.
2. Itâsstill requiredthatgovernmentcanprojecta positive impressionof growthandforthis,sowe assume that
the governmentwill fix itsownmeasuredinflationataround5% and will control stimulusandspendingsuch
that the Nominal GDPcomesto 2% aftercompensatingforitsownInflationof 5%.
3. Thiscase isrepresentedinaccompanyingExcel WorkbookinWorksheetwithname âAusterityâ.
CONSTANTS FOR THIS CASE
1. C_GMIN = 5% (Thisisthe governmentmeasuredAnnualinflationrate)
2. C_NGDP = 2% (Thisisthe governmentmeasuredAnnual GDPaftercompensatingforC_GMIN)
3. TV_TP = 90%
4. TV_TW = 271%
5. TV_BS = 74%
6. TGA = 136 Billion(Made Constantforease)
7. âTGA = 0
EQUATIONS FOR THIS CASE
1. âGDP = GDP(Previous Quarter) * (1 + (GMIN + C_NGDP))^(1/4) [Here 1/4 comes from annual to quarterly conversion]
2. M_TPâ = TPâ(2019 Q2) * (C_MTP + (1 - C_MPT) / (1 + AINR(Last Quarter) * TV_TP))
11. 3. TP = M_TPâ * (1 + AINR(Last Quarter))
4. TIC = (GDP â TP) / C_TP
5. TDS = TIC / (1+ TV_TW)
6. âBS = TIC * TV_TW / (1+ TV_TW)
7. âTW = TV_TW * TIC
8. âTD = TDS (asâTGA = 0)
9. AINR= TW / TW(2019 Q2) â 1
10. GDPâ = GDP / (1 + AINR)
11. TDâ = TD / (1 + AINR)
12. TGAâ = TGA / (1 + AINR)
13. BSâ = BS / (1 + AINR)
14. TWâ = TW / (1 + AINR)
MODEL PREDICTIONS
FOR FIXED CONSUMPTION
1. If we go downthe pathof fixedconsumption,the model predictsthat:
a. The Actual AssetInflationRate will reachanannual value of 50% injust 4 yearsand so will resultin
Hyperinflationwithinadecade.
b. The actual productivityfordevelopingeconomieswill take asignificanthit.
c. Due to hyperinflation,all numbersmeasuredinUSDwill show exponentialgrowth
d. Real Debtto GDP whencorrectedfor AINRwill notjumpsignificantly.
2. The above showsthat while âFixedConsumptionâpreventsthe societyfromgettingpoorer,itsunsustainable
and we are veryclose tothe endof its run.
FOR AUSTERITY
12. 1. If we practice austeritysuchthatstatedGDP grown remains2% in dollartermsandinflationisstatedas5%, we
see that the netconsumptionreducestonearlyhalf overthe nextdecade.
2. Decrease inconsumptionwouldmeanthatthe societywouldgetpoorer.
3. Evenin thiscase Actual AssetInflationRate indicatesAssetinflationof 5timesinnext10 yearsintermsof USD.
While thisisnothyperinflation,itâsstillsignificantlyhighinflation.
THE MIDDLE PATH
1. The above two casesare twoboundaryconditionsandthe actual path chosenmaylie betweenthese twocases.
2. Evenfor the middle path,the model predictsthatmajorworldcurrenciesare goingtolose significantvaluewith
respectto real goodsand servicesandsodiversifyingintootherAssetclassesmayhelp.
APPENDIX
ATTACHED EXCEL SHEET
INFLATION
PREDICTIONS BASED ON GAME THEORY MODEL.xlsx
EXCEL CALCULATION TABLE FOR FIXED CONSUMPTION
TUNING PARAMETERS
C_TP 50%
C_MTP 20%