All Things Being Equal
is a phrase that is left out more often than left in when it is actually a key and seldom true assumption behind an argument.
If you are talking about risk and risk models, that phrase should be a red flag. If the phrase is actually stated, the risk manager should immediately challenge it. Because when a major risk becomes a loss or threatens to become a loss, very rarely are all things equal.
Most, and possibly all, major loss situations have ripple effects. These ripple effects may be direct or they may be because they affect people who then in turn take actions that cause other unusual things to happen.
Here is a map of how the World Economic Forum thinks that the major risks of the world are interconnected:
Another example of a problem with the “All things Being Equal” assumption is the discussion of inflation. Few people remember to say it but when they worry that addional money in the system due to direct Fed actions or Stimulus spending will cause inflation – that would be true – ALL THINGS BEING EQUAL. But in fact, they are not equal, or even close to equal.
What is different is the amount of money that was in the system prior to the crisis other than the money from the Fed and the Stimulus. The losses suffered by the banks and the shrinkage of loans and the inability of consumers and businesses to get loans – each of those things REDUCES the amount of money in the economy. So in no stretch of the imagination are all things equal.
So the old rule about government spending being inflationary is only true ALL THINGS BEING EQUAL.
That does not, however, mean that there is not a difficult task ahead for the Fed to try to discern how fast the total money supply catches up with the economy so that they can reel back the money that they have put in. But the problem with that idea is that because of the amount of economic activity that has been totally privatized, the Fed does not necessarily have the information to do that directly.
So ALL THINGS BEING EQUAL, they will have to try anyway by looking at the pick up in activity from the parts of the economy that they do have information about.
Meanwhile, folks like the NIF are looking to help to improve the information flow so that proper management of the money supply is possible from direct information.
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