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"dal timgar" <dal_timgar@zensearch.net>



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                Economic Wargames

The following essay is about the economic system of the
world today.  One of my readers who approves of the
contents refers to "economic wargame" as a metaphor.
Much as I appreciate his approval, I disagree that it
is a metaphor.  This is the real deal. Let me give you
a metaphorical overview of my presentation.

The global economy is a giant multilevel, multiplayer
chess game.  It is however, being played in the dark.
The powers that be, have the overhead lights switched
off.  To have any chance you need a flashlight, and that
would still leave the problems of learning the rules and
developing your skills.  It seems most people only have
a vague idea that some game is going on.  I hope this
essay can be a candle, for ye who curse the darkness.

                 NNP = GNP - Dcap

This equation defines the Net National Product (NNP).
It is equated to Gross National Product (GNP) minus
Depreciation of CAPital goods (Dcap).  The trouble with
this equation is that depreciation of durable consumer
goods is missing.  Random House defines depreciation
thusly:

   1. a decrease in value due to wear and tear, decay,
      decline in price, etc.
   2. U.S. such a decrease as allowed in computing the
      value of property for tax purposes.

The fourth edition of Macroeconomics by Robert J. Barro
of Harvard University defines depreciation as:

  The wearing out of CAPITAL goods over time, often
  expressed as a fraction of the stock of capital.

When a car rental company buys automobiles, it contri-
butes to the GNP and therefore NNP.  The same applies
to cars purchased by consumers.  However, as consumer
autos deteriorate over the years the depreciation is
ignored, while that of capital goods is registered on
the income tax forms of businesses.  Although
economists have no direct method of obtaining
Depreciation of Consumer goods (Dcon), to pretend it
doesn't exist when it must be a rather large amount is
absurd.  How many billions of dollars worth of cars,
refrigerators, stoves, air-conditioners, etc., etc.
have American consumers trashed since the end of World
War II?  So the equation should be:

            NNP = GNP - (Dcap + Dcon)

Our economists are pulling a "Bill Clinton" on us.
Limiting the definition of depreciation in a way that
makes economic losses to the average man disappear
into space.

We live in a culture that has used complex machines
for 300 years.  The first patent on a steam machine,
number 356, was issued in 1698.  Engineers can test,
measure and specify the failure rate of mechanical and
electronic devices.  A graph of the failure rate over
time of a machine follows a pattern known as a bathtub
curve.

\ Infant Mortality                            _-~
 \                                         _-~ wear
  \         Useful Life             _____-~   out
   \__----------------~~~~~~~~~~~~~~         period
   MTBF
              time ------->

The curve gets its name from the obvious similarity to
the cross-section of a bathtub cut lengthwise up the
middle.  It starts with a high failure rate dropping
rapidly to a minimum. This is when the machine is new
and has a high probability of manufacturing defects.
The failures during this time are similar to birth
defects and are also known as infant mortality. The
low point on the curve is where the device is least
unreliable and the Mean Time Between Failure (MTBF) is
computed. The failure rate remains low for an extended
period then rises quickly when the device begins to
wear out.

So what does the failure rate of machines have to do
with depreciation of durable consumer goods?  In
classical economics it is common to assume that
consumers are rational, possibly for simplicity's
sake.  But how can rational decisions be made with
incomplete information?  The only consumer products
for which I have ever seen MTBF data are disk drives
for computers. Since computers have been primarily
used in businesses and losing data from hard disks
causes serious problems, supplying reliability data on
hard drives is traditional.  Where is the reliability
data on other consumer products?  What about cars,
televisions, VCR's?  How are we supposed to make these
rational decisions?  The best information I've seen is
in Consumer Reports.  They show graphs of failure
rates by brand name based on surveys of subscribers.
They do not give break-downs by model within brand and
usually only cover about eight brands of a product
type.  Are manufacturers trying to maximize the useful
life of their products?  If not, are they engaged in
planned depreciation, usually called planned obsoles-
ence?

In 1937 engineers at Lockheed began designing a new
fighter plane.  In January 1939 the first P-38 took to
the air for testing to begin eliminating design
flaws.  The P-38 Lightning began service in WWII in
April '42, it had two supercharged 1400 horsepower,
counter rotating engines, a cruising speed of 350 mph,
a maximum of 414 mph and a ceiling of 44,000 feet.
The German's nicknamed it "The Fork-tailed Devil".  A
squadron of Lightnings shot down Admiral Yamamoto over
the Pacific in 1943.

Another child of Lockheed was conceived in 1958.  It
became the SR-71 Blackbird, a spy plane instead of a
war plane.  Its maximum speed is still classified but
is acknowledged as being capable of 2350 mph at 80,000
feet.

If engineers were capable of these feats 60 and 40 years
ago, how can yearly variations in machines that roll
along the ground at less than 100 mph possibly be
exciting.  Going into debt to buy useless variations
in automobiles is economic insanity.  Retooling
factories to make parts that are shaped differently
but not technologically different increases the cost
and therefore the price of consumer products.  From
1908 to the early 1920's the Ford Motor Company made
the same machine, the Model T.  When introduced the
Model T sold for $850.  By the time it was
discontinued in the early '20's the price was less
than $300 and 15,000,000 had been manufactured.  If
the engineering capability that designed the Lightning
had been combined with manufacturing philosophy that
produced the Model T to manufacture cars in the '50's,
how good a car, at how low a price could have been
sold by 1960?

In an economic wargame society it is necessary to know
how to keep score and the tactics of the enemy.  An
individual's wealth is indicated by his or her net
worth.  Net worth is assets minus liabilities.  Assets
are anything which can be assigned a monetary value
that can be realized by selling the item.  Liabilities
are debts which have to be paid eventually.  So
maximizing assets and minimizing liabilities are basic
objectives.  However, all assets are not created
equal.  Some assets maintain or even increase their
value over time while others leak like a sieve.  If an
asset is so expensive one has to go into debt to
purchase it, then it is important to know how long the
asset lasts; how rapidly it depreciates.  Financial
advisors tell us that a home is the most expensive
purchase that most Americans ever make, followed by
automobiles.  Hopefully the value of ones home will
increase but the value of a car can only decrease.  By
not supplying reliability and durability data on their
products auto makers are leaving consumers in the dark
and engaging in information hiding.

If auto manufacturers produced lower cost, longer
lasting cars by eliminating useless design and brand
variations (Chevys and Pontiacs are both by General
Motors), then the savings on cars could be applied to
home mortgages.  A $100,000 mortgage over 30 years at
8% will ultimately cost $264,153.60, that's $164,153
in interest alone.  By paying an additional amount
each month a mortgagee can reduce the total interest
paid and eliminate years of payments.

Regular Payment: $733.76  Total Interest: $164,153.60

.....Extra Amount.....#....Approx....Total Amount of
....Added Each Pmt...Pmt...Yr..Mo....Interest..Saved
......$.... 0.00.....360...30...0.....$........0.00
...........50.00.....287...23..11.........39,907.13
..........100.00.....242...20...2.........62,458.66
..........150.00.....212...17...8.........77,433.46
..........200.00.....189...15...9.........88,262.94

Paying an extra $200/mo. nearly cuts the time in debt
in half while saving $88,000 in interest.  But the
money for that extra payment has to come from
somewhere.  Cars and credit cards are two possibilities.

In 1983 I read a letter that a bank sent to its
stockholders.  The bank informed its owners that it
encouraged the customers to take as long as possible
to pay back their loans.  This will of course maximize
the time over which interest is charged, thereby
maximizing the dividends to the stockholders.  My bank
recently sent me a credit card bill of $0.00 even
though it should have been over $100.  Their
explanation was:

    "There is no minimum payment due because last
    month's payment exceeded the minimum payment due.
    Your normal payment schedule will resume next
    month.  Finance charges will continue to accrue if
    the new balance is not paid in full by the due
    date."

They're content to charge me interest while "graciously"
allowing me to "save" money by not paying them one
month. Apparently I'm paying them faster than they
would prefer.  Making minimum payments on credit cards
means being in debt for years and paying 2 to 3 times
the purchase price for everything bought with the cards.

There is no limit to how dumb consumers are expected
to be, some company named Providian keeps sending me
an application for a Visa "Classic".  It has a $500
limit, 23.99% interest, a $49 application fee, a $59
annual fee and they have the NERVE to say it's a
limited time offer.  It's the third time I've gotten
the offer, I don't see how it could get worse in the
future.  If some fool were to take this offer and make
minimum payments of 3% per month with this interest
rate of 2% per month that would amount to
approximately $180 + $49 + $59 = $288 paid in the
first year and still leave a bill of $440.  How many
dummies do they find every month?

Buying "assets" that depreciate rapidly with credit
cards is screwing oneself coming and going, and the
stockholders get to laugh all the way to the bank.

In the mid-1940's John von Neumann, a Hungarian-American
mathematician, began inventing and applying game
theory to economics.  This "game theory" seems to be
stuck in academic never-never land and is rarely
mentioned in the real world.  Lester Thurow, an MIT
economist, made implications about it in his book, "The
Zero-Sum Society".  A zero-sum game is one in which
every gain by a "winner" is matched by an equivalent
loss by a "loser".  A bank's stockholders may be
winners while the credit card customers could be
losers.  One man's liability is another man's asset.
The global economic wargame is virtually inescapable. If
most worker/consumers don't know how to keep score it
is a good bet there are going to be a lot of losers.
According to one web site 50% of Americans have a net
worth of less than $10,000.  Two independent sources
claim that more than 60% of the people that get bill
consolidation loans to eliminate high interest debt,
proceed to charge up their credit cards again.

The Bible says:

        The rich rule over the poor,
           and the borrower is the slave
              of the lender.
                                 Proverbs 22:7

This bluntly states the power that wealth gives to
those who possess it.  To increase this power banks
send out millions of "slave" cards anually.  The
famous statement, "Freedom requires constant
vigilance" is usually assumed to apply to political
freedom but it is even more applicable to economics.
Having to make rent or mortgage payments every month
and possibly credit card payments means maintaining a
source of income, usually a job.  Wargames are
inherently unstable.  Companies get bought, companies
go out of business, jobs can be lost.

Our educators constantly talk about preparing students
for the workforce though businessmen regularly
complain about potential employees not being
sufficiently skilled.   Our colleges eagerly promote
statistics which indicate that higher education leads
to higher salaries.  That's fine for the income side
of the equation but how much attention is devoted to
the expense side?  How many high-school graduates know
what net worth is, or understand amortization
schedules?  What good does it do if our educators only
create competent employees who then get fleeced of
their hard earned cash?  Or could it be that our
educators are another set of fleecers?  I once saw a
TV program which interviewed people who told employers
they had college degrees but had actually lied.  Many
of them worked for years, got raises and promotions.
What do you need to know to pretend you have a degree
in psychology, or history, or english literature?
Spend a few months reading some decent books and who'll
know the difference?  Was it 60 Minutes?  I can't
recall.  Of course this was years ago and cheap
computers and telecommunication have probably made
verification of education much easier.  This may not
work today.  Could it be I'm getting too cynical?...
...Nahh!

I'm getting tired of typing so before signing off I'll
just suggest doing a little web browsing to check
stuff for yourself, like von Neumann and game theory
and P-38 Lightnings.  You might check out a few books
too:

 Rich Dad, Poor Dad                by Robert Kiyosaki
 interesting look at the psychology of rich vs poor

 Your Money or Your Life
                     by Joe Dominguez and Vicki Robin
 too pollyannaish but has its priorities straight

 The Screwing of the Average Man     by David Hapgood
 out of print but still locatable

 Mastering the Art of War & The Art of War by Sun Tzu
                    translated & edited Thomas Cleary
 wargamers training manual, time tested

So, to misquote that Vulcan that never explained what
it meant to prosper, "Live long and good luck in the
economic wargame".  No, that's no good, Vulcans don't
believe in luck. Make that, "Live long and use Sun Tzu
tactics (in the economic wargame)".

                                           Dal Timgar

If you approve of the contents of this essay, feel
free to copy, email or otherwise distribute.

     The truth is a virus, spread the contagion.

                               dal_timgar@zensearch.net
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How many economists with PhDs does it take to do
grammar school algebra?

Unknown, we don't have enough yet.





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