America's 339 Months Pointed to the Same Answer (2)

This piece is the middle portion of Chapter 20 (2) of The Declaration of the Age of Physical Economics (Yoon Jong-won, Yoon So-ri, Yoon Jun). It is an academic account presenting the authors' physical economics hypothesis, and the body, figures, and citations follow the manuscript as written.

Dot-com 2001, a Case the Satellite Caught and the Blockade Diagnosis Missed

If a signal that one diagnostic tool failed to catch was caught by another diagnostic tool, that fact itself demonstrates the validity of the diagnostic design. The 2001 U.S. dot-com bubble is such a case. The blockade diagnosis only reached the warning threshold and stayed at the level of a single-blockade partial activation, and no entry into a crisis stage occurred. Over the same period, the nighttime lighting data of the U.S. Defense Meteorological Satellite Program (DMSP) caught a decline of about 20% in 2003 relative to the 2000 peak. This is a result in which the satellite independently confirmed the physical contraction that the blockade diagnosis missed, and it is a case in which the value of the triple diagnostic design was demonstrated with actual measured data.

Following the timeline of the dot-com bubble, after the Nasdaq Composite Index recorded a peak of 5,048.62 on March 10, 2000, a decline began, and it fell to 1,114.11 on October 9, 2002, a drop of about 78% from the peak. Over the same period, the U.S. NBER declared the eight months from March to November 2001 an official recession, and the shock was compounded by the simultaneous multi-site terrorist attacks of September 11. In cities where the information technology industry was concentrated, such as California's Silicon Valley, Seattle, Boston, and Austin, Texas, large-scale layoffs and office vacancies occurred. The economic shock at the surface was not small, but the signal of the blockade diagnosis did not reach the crisis stage.

There are two branches to the reason the blockade diagnosis did not enter the crisis stage. The first branch is the operation of the multiplicative structure. The channel blockade (DLT) was partially activated, and consumption and industrial production slowed, but the signal blockade (CAM) did not hold. Household disposable income was partly affected by the wage decline in the information technology sector, but employment in other industrial sectors was maintained, and the path along which policy signals reached households was alive. The Federal Reserve carried out a cumulative 475bp cut in the benchmark rate from January to December 2001, and as this signal reached the microvasculature, the activation of one blockade could not ignite the other. The product of CAM and DLT was close to 0, and the system recovered on its own.

The other branch is the limit of gauge density. Between 1998 and 2003, the data availability of the U.S. V-Series and the 9-axis gauges was lower than after 2020. Some gauges were not collected on a monthly basis, and the time series of some gauges was short, making trend comparison difficult. The point at which the 9-axis 59 gauges were fully built was after the mid-2010s, and from 1998 to 2003, roughly 25 to 35 gauges were in an active state. In periods when gauge density is low, there is a structural limit in which crisis signals are dispersed and threshold breakthrough becomes difficult. The result that the blockade diagnosis failed to catch the dot-com crisis at the crisis stage is a direct result of this data limitation, and it is an output produced by the limit of the available data rather than a system defect.

The very fact that this limit was revealed is the academic honesty of the system. It is a design that does not claim to have caught every crisis with the same accuracy, but acknowledges the fact that detection power varies with data availability. The system's direction of evolution, in which detection power grows stronger as the time series lengthens and gauge density increases, is confirmed in the dot-com case. The expansion from 25 gauges in 1997 to 59 gauges in 2020 produced a result that improved detection power for the same crisis by about twice or more, and the accurate macro-crisis classification shown when the same engine was applied to the 2020 COVID shock is direct evidence of that improvement.

Even though the blockade diagnosis failed to catch the dot-com crisis at the crisis stage, satellite measurement accurately caught the contraction of economic activity in the same period. In the nighttime lighting data of the U.S. Defense Meteorological Satellite Program, the U.S. nighttime activity index recorded a peak of 3.83 (in DN, Digital Number units) in 2000, then fell 7.3% to 3.55 in 2001, and dropped to 3.05 in 2003, recording a cumulative decline of 20.4%. The fact that a city's nighttime lighting fell by 20% means a decline in electricity consumption, a slowdown in factory operation, and a contraction of commercial activity. The satellite caught the pattern in which nighttime activity decreased most in cities where the information technology industry was concentrated, such as Silicon Valley, Seattle, and Boston, and in the city-level analysis this magnitude of decline greatly exceeded the overall U.S. average.

Dot-com 2001 Satellite Standalone Verification: Nighttime Lighting That Supplemented the Limit of the Blockade Diagnosis

The data of the surface temperature satellite (Landsat 5) provides supplementary confirmation. The average surface temperature of the U.S. mainland showed almost no change, from 30.77 degrees in 1998 to 30.88 degrees in 2001, but rose to 31.68 degrees in 2003. When urban activity slows, a pattern appears in which the heat of the city center weakens and disperses to the suburbs, and the result that the U.S. mainland average rose slightly is interpreted as a dilution effect due to natural variation in rural regions. In the city-level detailed analysis, a pattern is confirmed in which the urban heat island of major information technology hub cities such as New York, San Francisco, and Chicago weakens, and this directly reflects the slowdown of downtown industrial activity.

Proposition 9 that the dot-com case verified, namely the value of satellite standalone verification, is revealed in two branches. The first branch is the fact that when the blockade diagnosis runs into its limit, the satellite supplements that limit. Even in periods when gauge density is low and data availability is limited, the satellite directly measures economic activity from space, so it can bypass the limits of government statistics and gauge data. The other branch is the fact that the triple diagnostic design does not remain a theory but operates on actual data. It is a result in which the complementary structure, where another tool completes the diagnosis when the output of one tool is weak, was demonstrated as an actual measured case.

In the 339 months of the United States, the dot-com crisis is classified as one of the three cases of single-blockade self-recovery of the blockade diagnosis, and at the same time it is also classified as a case in which the satellite caught a strong signal. The reason the two classifications are not contradictory is that the two tools measure different angles. The blockade diagnosis measures whether the system will enter the crisis stage, and the satellite measures the change in physical economic activity. The dot-com crisis did not reach entry into the system stage (blockade diagnosis single-blockade self-recovery), but there was a clear contraction in physical activity (satellite -20.4%). The very fact that the two measurements show different faces of the same truth demonstrates the coherence of the triple diagnostic design.

The 2011 Credit Downgrade and the 2022 Rate Shock, Verification of the U.S. Multiplicative Structure

In the previous chapter, Korea's three cases of single-blockade self-recovery directly verified the multiplicative structure of the signal blockade (CAM) and the channel blockade (DLT). It is the proposition that even when one blockade is partially activated, if the other does not hold, the product approaches 0 and the system recovers on its own. The same proposition was verified in the 339 months of the United States at exactly the same three periods. The three periods are the 2001 dot-com, the 2011 downgrade of the U.S. Treasury credit rating, and the 2022 surge of U.S. interest rates, and the very fact that in both countries a single blockade ignited and then self-recovered in the same three periods points to the universality of the multiplicative structure.

On August 5, 2011, the international credit rating agency Standard & Poor's (S&P) downgraded the credit rating of U.S. Treasuries from AAA to AA+. It was the first case in history in which the U.S. Treasury credit rating was downgraded, and global financial markets received a major shock. On August 8, the first trading day right after the downgrade announcement, the Dow index fell 5.5%, and the status of U.S. Treasuries, which had been regarded as safe assets, was shaken. In the U.S. blockade diagnosis, the signal blockade (CAM) was partially activated, and stress was detected simultaneously on the circulatory system (A1) and immune system (A5) axes. The activated trigger was a single one, H (monetary sclerosis). It was a state in which the signal was momentarily blocked in the international money market.

However, the channel blockade (DLT) did not hold. The disposable income of U.S. households was partly affected by the shock, but the scores of the digestive system (A3) and population/vulnerable (A8) axes maintained a stable stage. It was a period when U.S. V-Series V13 DSR was near 11.5%, a state lowered by 1.7 percentage points from the 2006 peak of 13.2% through post-GFC deleveraging (debt reduction). There was room for the accumulated microcalcification of households to absorb the shock, and the household channel was maintained. CAM was partially activated, but because DLT was close to 0, the product was close to 0, and the system self-recovered in about two months.

In 2022, a single blockade in the opposite direction was activated. From March of that year, the Federal Reserve rapidly raised the benchmark rate in response to inflation, and over the course of 2022 it raised it by 425bp, up to the 4.25% to 4.50% range. Household mortgage rates rose to the 7% range on a 30-year fixed basis, and the interest burden of households surged. U.S. V13 DSR rose to the 11.3% range, and the channel blockade (DLT) was partially activated. Stress was detected simultaneously on the digestive system and population/vulnerable axes, and the activated triggers were two, I (cost explosion) and A (price surge). It was a state in which the consumption channel of households had narrowed.

However, the signal blockade (CAM) did not hold. The score of the circulatory system (A1) axis maintained a stable stage, and the path along which the Federal Reserve's rate hikes were signaled through to households was alive. The household labor market was in a strong state (unemployment rate near 3.5%), and wage increases offset part of the interest burden. In the multiplicative structure, because CAM was close to 0, the product was also close to 0, and the system again self-recovered. The single blockade that occurred in Korea in the same period was also the same pattern. DLT was partially activated and the household interest burden surged, but because CAM did not hold, it self-recovered.

U.S. Three Cases of Single-Blockade Self-Recovery: The Same Three Periods in Both Countries

The fact that all three periods of U.S. single blockade occurred in the same periods as Korea's single blockades and self-recovered by the same multiplicative-structure principle is a result verifying Proposition 4, namely the universal operation of the CAM × DLT multiplicative structure, in both countries. Seven cases in Korea (2 dual blockades + 2 CAM-alone single-blockade advance warnings that led into crisis (the 1997 IMF crisis and the 2003 card crisis) + 3 self-recovering single blockades) and five cases in the United States (2 dual blockades + 3 self-recovering single blockades) were output consistently by the same multiplicative-structure principle, and in both countries, in periods when only one blockade was activated, the system self-recovered.

There is a reason this parallelism is not a coincidence. All three periods of 2001, 2011, and 2022 were periods in which a shock that ignited in the United States was transmitted to Korea, and in both countries the same external shock interacted with different internal structures. Even so, the fact that the output of the multiplicative structure was in the same direction in both countries points to the multiplicative structure being a universal principle not governed by the kind of shock or the particularity of a country. The mathematical proposition that a crisis ignites only when both the CAM and DLT blockades are activated, and that if even one is close to 0 the system self-recovers, operated identically in the data of the two countries.

COVID 2020 United States, the CARES Act's 2.2 Trillion Dollars Reaching the Microvasculature Directly

If a prescription of direct microvascular injection for a macro crisis had shown effect in only one country, doubt would remain about the universality of that prescription. In COVID 2020, Korea and the United States passed through the same kind of macro crisis simultaneously, both countries carried out a prescription in the form of direct microvascular injection, and in both countries the blockade was lifted within one month. The fact that the two countries reached the same result even though they used different policy funding scales and different policy tools is the verification of the universality of Proposition 5.

The U.S. COVID crisis timeline proceeded almost simultaneously with Korea's. On January 21, 2020, the first COVID confirmed case in the United States was reported in Washington State, and on March 11 the World Health Organization (WHO) declared a pandemic. On March 13 the Trump administration declared a national emergency, on March 19 California entered the first U.S. statewide lockdown, and by the end of March more than 90% of the U.S. population was placed under stay-at-home orders. At the same time, the S&P 500 fell 33.9% in one month, from a peak of 3,386.15 on February 19 to a trough of 2,237.40 on March 23, and in the U.S. blockade diagnosis a dual blockade held in April. The score signal entered the crisis stage, simultaneous warnings occurred on multiple axes, and the triple trigger of D, I, and H was activated.

The fact that the V-Series was "very low" in 2019 was the primary variable of the recovery speed. In 2019, U.S. V13 DSR was 9.7%, the lowest level since the 1980s. It was the result of household debt reduction over about 10 years after the global financial crisis, which lowered V13 by about 3.5 percentage points from the GFC peak of 13.2%. The savings rate (V6) had recovered to 7.5%, the house-price-to-income ratio (V4) had come down to a stable stage of 4.2 times, and the current account deficit (V7) had also eased its chronic deficit to -2.2%. It was a case in which the U.S. household microvasculature took the external shock in a clean state, and in the same period Korea's V-Series was also "undetected." Both countries were in a state likened to a patient who suffered a traffic accident with no underlying disease.

The scale of the prescription was the 2.2 trillion dollars of the CARES Act (Coronavirus Aid Relief and Economic Security Act). President Trump signed it on March 27, 2020, and it was the largest single economic stimulus bill in history. Its core was a structure in which the funds reached households and small and medium-sized enterprises directly. A direct cash payment of 1,200 dollars per person (for adults with an annual income below 75,000 dollars) and an additional payment of 500 dollars per child were deposited straight into household accounts. At the same time, an additional 600 dollars per week in unemployment benefits (Pandemic Unemployment Compensation) was paid for four months, and the eligibility for unemployment benefits was expanded to the self-employed and temporary workers. To small and medium-sized enterprises, 669 billion dollars of the Paycheck Protection Program (PPP) was injected, and unsecured loans conditioned on paying employee wages were supplied directly.

The result of these funds reaching the microvasculature appeared as a one-month lifting of the blockade. In the U.S. blockade diagnosis, the crisis signal that peaked in April returned to the normal stage in May, and the dual blockade was lifted. In the same period, the U.S. mainland nighttime lighting data also showed, after the sharp drop of the April lockdown period, a rapid V-shaped rebound from May. The nighttime lighting of downtown Las Vegas fell to nearly half of its usual level and then recovered along with phased reopening, and activity in the Manhattan office district also gradually returned. All three tools of the satellite, the blockade diagnosis, and the V-Series output the same picture, and the accurate classification of the macro-crisis category and the immediate effect of the direct-microvascular-injection prescription operated identically in both countries.

The speed at which CARES Act funds reached households operated on a time structure parallel to Korea's first supplementary budget. The U.S. Internal Revenue Service (IRS) began the first deposit of the 1,200-dollar-per-person direct payment on April 11, 2020, and by the end of April the deposit was completed for about 88 million households. The additional payment of 500 dollars per child was also automatically calculated in the same period and paid together. The 600-dollar-per-week additional unemployment benefit (Pandemic Unemployment Compensation) began its first payment on April 4, and operated for four months until July 31, paid to about 40 million unemployed people. The first round of 349 billion dollars of the Paycheck Protection Program (PPP) began accepting applications on April 3 and its funds were exhausted by April 16, and about 1.6 million small and medium-sized enterprises received unsecured loans averaging about 210,000 dollars in scale. In Korea as well, in the same period, the first supplementary budget passed the National Assembly on April 30, and from May 4 the payment of emergency disaster relief funds of up to 1 million won per household began, with more than 90% reaching households by mid-May.

The U.S. nighttime lighting satellite data precisely caught the contraction and recovery of activity by city during the lockdown period. In the Black Marble nighttime lighting data of the U.S. National Aeronautics and Space Administration (NASA), the nighttime lighting of downtown Las Vegas decreased by about 25% relative to the normal year in March 2020, nighttime activity in the Manhattan office district fell by about 40%, and the downtown Houston area also recorded a decline of about 30%. However, from May, along with phased reopening, the nighttime lighting recovered rapidly. Georgia decided on the first U.S. partial reopening on April 24, Texas entered phased reopening on May 1, and some California counties on May 8. By the end of May, most U.S. states had entered stage-one reopening, and nighttime lighting also recovered to about 80% of the normal year. The result that all three tools of the satellite, the blockade diagnosis, and the V-Series output a recovery in the same direction in the same period shows the fact that measurement agreement between tools operates not only at crisis entry but also at the recovery stage.

Examining the difference in prescription scale between the United States and Korea, the ratio to GDP of the two countries is compared. The 2.2 trillion dollars of the U.S. CARES Act corresponded to 10.5% of the roughly 21 trillion dollars of U.S. GDP in 2020, and the 14.3 trillion won of Korea's first supplementary budget corresponded to 0.74% of the roughly 1,933 trillion won of Korea's GDP in 2020. The result that the United States injected a prescription about 14 times the scale of Korea's as a ratio to GDP reflects the difference in the scale of the crisis shock between the two countries. Whereas the United States recorded a record-largest plunge of -31.4% GDP (annualized) in the second quarter of 2020, Korea's second-quarter GDP was -3.2%. The scale of the shock differed by about 10 times, the scale of the prescription differed proportionally, and in both countries the lifting of the blockade occurred within one month. The fact that the scale of the prescription was proportional to the scale of the shock, and the fact that the prescription principle of reaching the microvasculature directly was applied identically, produced the same recovery speed in both countries.

The very fact that a prescription of direct microvascular injection for a macro crisis produced the same effect in two countries points to a universal principle of policy prescription. If in the same period the two countries had concentrated only on recapitalizing large financial institutions, it is highly likely that the funds released through quantitative easing would have flowed into asset markets and pushed up real estate and stock prices. The pattern both countries experienced during the global financial crisis, namely the pattern in which funds do not reach households through rate cuts alone, would have repeated. As both countries placed weight on direct household support from the start in COVID, the time until the lifting of the blockade was reduced to one-sixth compared with the global financial crisis. The fact that the prescription principle of reaching the microvasculature directly operated not only in Korea but also in the United States is the universal verification of Proposition 5.