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Re: Mental Models-Inflation Feedback Loops As Recursive Algos.
In thinking about inflation feedback loops,” I have been toying with a mental model borrowed from computer science, RECURSION, which I think neatly encapsulates the problem and points to a “way out.”
In computer science, a RECURSIVE function/algorithm involves a function that calls itself, much like the mythological “Ourobouros” consumes itself — there is no seeming end to a recursive loop.
A simple example of a problem easily solved by recursion is a function that computes the factorial of a number n. Recall that factorial(n) is mathematically represented by “n!”which equates to 1*2*3*4...*n.
Here is such an algorithm, expressed in pseudo-code: Functional Factorial(Input: n)
{
If (n>1) Ouput: n*Factorial(n-1);
Else Output: 1; }
If you follow this logic, you will see that this is an elegant way to solve this math problem BUT the key to recursion working is that there is an EXIT CONDITION out of the recursive loop — in this case the “Else” clause when n reaches 1.
Without this EXIT CONDITION, the computer falls into an infinitely recursive loop which eventually “breaks the system” in the result of a “STACK OVERFLOW” error.
A computer, like the real world, has finite resources, and each time a function calls itself, a data structure called a STACK keeps track of the environment variables, e.g. the inputs and outputs at each level of recursion.
The deeper the recursion, the taller the STACK, but there is a limit to how high the STACK can go.
In a properly constructed factorial algo, the recursion will only “stack up” n times before it hits the EXIT CONDITION, allowing the STACK to “unwind.” Resources are adequate as long as n isn’t too high.
If n is too high or worse, if there is no EXIT CONDITION at all, the computer runs out of resources, resulting in a STACK OVERFLOW error, analogous to other “system breaks” like the Tacoma Narrows Bridge or Weimar Hyperinflation, explained here:
Back to the current macro setup, the Fed/Tsy seem to be in a recursive loop of stimulus begetting more stimulus.
Stimulus/wealth redistribution->puts $ in hands of lowest wealth deciles who spend mainly on “opex” commodities (food/energy/shelter)->”opex” commodities rip and disproportionately impact lowest wealth deciles->politicos demand more stimulus/wealth redistribution.
For various reasons (like the GEOGRAPHIC ADVANTAGES mentioned in this thread), our “STACK capacity” is larger than most and allows this recursive madness to go on longer before “breaking the system”:
Furthermore, I believe we DO have an EXIT CONDITION that prevents the STACK OVERFLOW scenario: Inflation of “opex/capex” commodities (food/energy/shelter) to a politically untenable degree that forces the Fed to taper and “allow the STACK to unwind.”
Here ends Part II of my Mental Models series.