As the conversation jumped around, I found myself frequently thinking, "Show me the model". That is out of character for me, because I have spent a lot of the last few years criticizing economists' use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker.For me, a fully functioning and dynamic model, would be one which has sufficient primary market formation, that additional secondary market formation also makes sufficient sense to all concerned. Alas, that is not the case right now, as central bankers attempt to dampen the secondary marketplaces of the present through arbitrary means.
There's also a recurring thought about models which continues to stump me, because simple though it seems, I'm still missing something. Coordination is valued according to equilibrium. Single price structures for time based services in particular, refuse to work the same way in (invariably unique) local non tradable settings, as for the price coordination of tradable sector commodities and goods at international levels. Equilibrium definition makes all the difference for supply, demand, output and growth, because of the ways in which its tradable and non tradable sectors interact and also, respond to already existing factors. How to think about this?
Growth and output depend on the relationships between full equilibrium settings versus partial equilibrium settings. Full (international) equilibrium and its corresponding coordination/pricing mechanisms are best represented by tradable sectors and their related primary markets, which serve as a scaffolding for world wealth. Each secondary market necessarily operates as a partial equilibrium, which due to its construction can only take limited resource sets into account.
Fiat monetary formation also served as a formal recognition (by policy makers) of secondary marketplace importance, in the 20th century. Nevertheless, the underlying reasons for this more flexible monetary policy structure, were never fully resolved or understood. For instance: If central bankers were conscientious to maintain nominal income or aggregate spending capacity, they would be doing a better job of stabilizing the relationships between primary and secondary markets, than is presently the case.
Primary markets are most closely related to the exogenous measured wealth of nations, as opposed to the endogenous formation of (secondary market) credit and other facets of non tradable sector activity. Government backed economic activity and financial markets exist as the most substantial secondary markets, in part because of the extensive economic access and liquidity they make possible. The measured wealth of a nation also depends on its exposure to exogenous or worldwide wealth, which is reasonably captured by the measure of nominal income. For each central banker which accurately measures nominal income, it becomes easier for a nation to more closely reflect their own participation in exogenous wealth creation, alongside endogenous wealth.
While all of government subsidized activity can be considered as secondary markets (due to the partial equilibrium of revenue redistribution), many forms of financial product nonetheless fulfill roles as a point of market origination. Time and knowledge based services presently exist only in secondary marketplace roles, though they have the potential to function as (local tradable) primary markets as well. In the meantime, secondary market roles are not only quite important, they serve as what is sometimes the only means to coordinate time value, which otherwise doesn't readily correspond to general equilibrium market circumstance. Secondary financial markets are all the more important, since not enough of today's knowledge based activity exists in primary marketplace roles.
Perhaps most important for this post, is that secondary markets exist as partial equilibrium valuations which tend to quickly react to negative aggregate demand shocks, that particularly affect the broad valuation of tradable sectors. For instance, when excessive market tightening occurs, the commitments and investments of local high skill service providers can be threatened by slow - but nonetheless steady - disinflation strategy. Too few individuals realize that turning back the clock on globalization, could threaten the worldwide primary market scaffolding that supports today's general equilibrium revenue structure. Most - if not all - investment terms for high skill general equilibrium knowledge use, extensively rely on this framework.
Ultimately, more secondary markets need to be transformed into primary markets, so that the present backlash against globalization will ease. And given the present lack of (local) primary market roles for time value, it is all the more important for all concerned to understand how extensive investment commitments remain threatened by the "cold feet" of central bankers. These forms of knowledge preservation are all we presently have on formal economic terms, because time value does not yet clear (coordinate by price) in a complete marketplace context. Neither time value or knowledge preservation are understood in a complete framework, as a requisite necessary aggregate for human capital.
Given this reality, the fact credit does not recognize but a fraction of personal wealth potential, should make it obvious that credit only exists as a secondary market. Alas, many are fooled by the idea of interest as the price of money instead of credit, even though credit does not exist in a way which allows it to price or coordinate the general equilibrium broad wealth context it purports to represent. The fact credit markets are secondary, also accounts for the fact that inflation targeting is an inappropriate means to capture equilibrium wide dynamics for economic stability.
Consider more closely as well, why credit serves neither as a point of either monetary or economic origination. Credit is a claim on what is already existing economic time value, from previous wealth formation. Credit is an endogenous response, to wealth which is both exogenous and endogenous in nature. And it is only as tradable sector wealth leads to greater economic complexity, that credit can become part of the process.
When central bankers choose to protect asset and credit formation over a continuous level of aggregate spending capacity, they cannot provide a stable lever for the delicate balance that exists between the additional coordination roles which primary and secondary markets of necessity provide for one another. This balance and coordination between the two matters all the more, given the level of dependence which non tradable sectors will continue to have on the exogenous wealth of international tradable sectors, well into the future.