Quantum Monetary Policy

Who was right, Sir Isaac Newton or Niels Bohr?

On the face of it, that’s a silly question. Bohr was a physicist who built on the foundation that Newton constructed. Newton was an enlightenment scientist who essentially invented physics and calculus. His laws of motion describe most of the world we live in. But early in the 20th century a group of physicists—including Bohr—were trying to understand what happened when things got very, very small and realized that they had to revise those laws.

For most of life, Newton’s Laws work quite well. Things at rest remain at rest; acceleration is proportional to force times mass; and for every action there is an equal and opposite reaction. Movement—per calculus—can be broken down into infinitely smaller divisions of time and space. The world of classical mechanics is the world we live in, and it’s accurate most of the time.

And this world of clear laws and continuous movement seems to describe the models that policy makers are using to manage the economy. Per calculus, the Fed seems to believe that they can move interest rates an infinitesimally small amount at a time. But rates around the world are so low—and have been so low for so long—that I don’t think classical monetary policy is accurate here.

Niels Bohr formulated the notion that electrons “jump” from one energy level to another in discrete steps—not continuously—and give off or discrete packets of energy in the process. In the same way, once there is the slightest hint of tighter monetary policy interest rates will jump to the next level. It won’t be a smooth, continuous function; it will be sharp–and nasty.

A corollary to Bohr’s atomic model is the uncertainty principle—that one can’t know both the position and velocity of a tiny particle. That’s where we are with monetary policy today: we know where rates are. We really don’t know where they’re going.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-01-09T10:52:53+00:00January 9th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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