Several Possible Realities of Our Universe

Brennan Dwyer

 

Introduction

Philosophy is a very important way of looking at the world. Philosophy attempts to describe many aspects of society, such as consciousness, and our understanding of reality. Everyone personally has their own viewpoint of philosophy. In many ways, philosophy is a stepping stone towards science. Philosophy can also be seen as a qualitative way of describing reality, with mathematics being very rarely used in it. To go more in depth, from a philosophical standpoint we all have our own viewpoints on reality. With the deepest and most fundamental questions of our universe, this philosophy paper doesn’t just have one theory for them, but several different theories for what may be the biggest answers to these questions regarding our reality.

 

Scientific Reality

The first theory for reality stated by this paper touches upon the idea that everything is very scientific, and not created by any higher being or influenced by a more advanced civilization then our own. This theory argues that the universe likely originated from something like a black hole. A possibility is that when matter and energy goes past the event horizon of a black hole, it spawns different universes, and as time goes on the universe expands as it approaches the singularity of the black hole, which we describe as dark matter and dark energy. This idea would lead to the conclusion that there is no possibility of a higher power or our universe being a simulation. However, this idea may make it logical that our universe is full of extraterrestrials, as opposed to if our universe was a simulation or from a higher power, which may design our universe so that we are the only living beings in the universe. As shown on Table 1, in this possible reality, our universe likely came from a black hole. However, it is important to note that this isn’t proven scientifically, but what is generally agreed upon by physicists is the big bang. Table 1 also gives the characteristic that this reality is very likely to have the existence of aliens. This is due to there not being anything like a higher power to regulate the universe and focus all of the attention on one planet. Finally, Table 1 stated that this reality doesn’t have an afterlife. This is due to it being a scientific reality with there being no logic for how or why there would be an afterlife.

 

Spiritual Reality

The second theory stated in this paper regarding our understanding of reality is that our universe originated from consciousness, therefore from a higher being. Unlike what is commonly theorized in organized religion, this paper states that this higher being likely has a finite period of suffering on Earth set up for our benefit, and not for his, hers, or their self-inflicted interest, (since we don’t know the gender of this possibly existing higher being.) This higher being could be doing what’s for the greater good, and not so that everyone is tested upon faith. The idea is that there is an input-output model that first spawns life into a simpler and less pleasant environment for a finite period of time with a very hands-off approach, which then leads to the output being an infinite period of happiness. Assuming that this higher being is trying to accomplish what is most beneficial for everyone, they need everyone to have this finite period of suffering so that everyone can be happier in the long run. This finite period of suffering likely doesn’t just act as a time period when suffering can be experienced so that subconsciously everyone can experience more happiness in the afterlife. This finite period of suffering also likely acts as a spawning point where culture and personality can form, so that when everyone reaches the afterlife, there is a lot of individuality and culture. Also, this finite period of suffering can act as a learning experience so that people are mature and ethical once they reach the afterlife. Finally, this finite period of suffering can act as a place where certain bad individuals can be reincarnated if they are seen as a threat to the safe and accepting afterlife, specifically for people who have committed horrific atrocities towards other human beings. As shown on Table 1, if the universe has a spiritual reality, the origin of the universe would likely be consciousness. This would suggest that the higher being that created this universe in this reality was a conscious being, and allowed there to be consciousness in lifeforms here on Earth. Table 1 also states the existence of other aliens being unlikely. This is due to the possibility that the higher being may want to focus the input-output model on one location. Finally, Table 1 states that the existence of an afterlife is very likely. The reasoning for this was already explained earlier in this section of the paper.

 

Simulated Reality

Finally, the third theory stated for reality is that we are in a simulation, but are not aware of it. Technological progress has in a way grown exponentially. It is amazing how much we have grown within the past century, and the fact that virtual reality already exists. It would make logical sense that our technology will get so advanced to the point of being able to create a simulation as realistic as the real world. This sort of reflects the idea that the famous philosopher Plato had, specifically found in The Republic (Bender, 1993). Plato had this idea of a group of people that were stuck in a cave, where they were not aware of the outside world (Bender, 1993). It was hard for them to know of the outside world, as they didn’t have a way of knowing about it and all of their knowledge was limited to the cave. It is interesting to compare the similarity between this cave idea made by Plato thousands of years ago, and the idea of everyone living in virtual reality. More recently, a movie that came out in the year 1999, titled The Matrix, revolved around the idea of virtual reality. Though it would be hard to know the reasoning for all of us being put into a virtual world, it would be logical that it may be a similar reason to the finite period of suffering with the spiritual reality. This finite period of suffering could be within the simulation, much like Earth is with the spiritual reality, and then people get to be part of the advanced and pleasant civilization outside of the virtual reality, much like the afterlife in the spiritual reality. As shown on Table 1, the origin of the universe for the simulated reality that we would all observe would be from virtual reality. However, it would be logical that the origin of the universe that is outside of the virtual world is much like with the scientific reality. However, the outside world could be very different and even incomprehensible compared to the virtual world that everyone is in. This would lead to the idea that the existence of aliens would be unknown, because of how different the universe outside of the virtual world may be. Finally, Table 1 stated that the presence of an afterlife would be unlikely. It could be unlikely due to a higher power not wanting people to replicate the system of Earth and Heaven. The higher power may want to stick to their version of the afterlife, which may be much happier then what can be replicated by people.

 
Philosophy 1
Table 1: Chart of key characteristics of the three different possible realities.

 

Conclusion

In conclusion, this paper stated the possibility of three possible realities for our universe. The three possible realities discussed in this paper were a scientific reality, a spiritual reality, and a simulated reality. Though there isn’t any way of knowing for certain what our reality may be, it would be logical to at least come up with a few different possibilities, especially considering the logic presented in this paper for why each may be our reality. Table 1 helped organize the different characteristics of each reality, specifically with what the origin of the universe would be, if there are aliens, and if there is a presence of an afterlife.
 

 

 

Works Cited

Bender, D. L. (1993). Constructing a life philosophy: Opposing viewpoints. San Diego: Greenhaven Press.

The Matrix. (1999, March 31). Retrieved from https://www.imdb.com/title/tt0133093/

Suggested Method of Trading and Economic Development for Developing Nations

Brennan Dwyer

 

 

Global poverty is a major issue, which especially affects people in developing nations. “About 40% of the world’s population lives on less than $2 per day, according to 2004 World Bank Estimates” (Whitman, 2008). Most extreme poverty is especially bad in South Asia and Sub-Saharan Africa (Whitman, 2008). It is important to note that many experts believe that countries have seen large increases in per capita income due to international trade and direct foreign investment (Whitman, 2008). However, not all regions of the world have access to global trade (“Poverty, Inc.,” 2014). For example, Africa has many resources such as oil and gold, but is disconnected from global trade (“Poverty, Inc.,” 2014).

This paper gives a suggested method of trading and economic development for developing nations. The suggested methods of trading within this paper are largely inspired by the flying geese paradigm. The flying geese paradigm is a set of empirical evidence that attempts to explain the fast economic growth in East Asia (Kojima, 2000). The theory specifically explains the process of developing nations catching up though industrialization (Kojima, 2000). Kaname Akamatsu, the economist that originally came up with the theory, also created the term “Flying Geese Pattern of Development” (Kojima, 2000).  He based this term from the two patterns he observed within the model that looked like a flying geese pattern (Kojima, 2000). Much like the logic behind the flying geese paradigm, this paper suggests that developing countries should diversify and become more industrialized in order to become more developed countries. Currently, developing nations mostly export primary goods, and import finished goods. However, this paper states theoretically in order for developing nations to become more developed, they should quickly shift towards importing mostly unfinished goods, raw materials, and machinery and equipment from developed countries, so that the developing countries can create their own finished goods. It is suggested that they produce more of their own finished goods so that they can diversify and not have as much reliance with other nations to obtain finished goods. Also, it would be logical to assume that if the developing nations produced their own finished goods, that they can export them in exchange for a large amount of revenue or imports.  

Figure 1 is a flowchart of the suggested process for developing nations to adopt with trade.

The flowchart would work as a step by step process as follows:

1.      Developing nations extract natural resources and export them in return for imports that consist mostly of a large diversification of various raw materials and physical capital. A small amount of the imports would consist of finished goods to occupy the nation for that phase of time before they are able to successfully produce their own finished goods.

2.      The developing nations then use the imported raw materials and physical capital to produce finished goods. A portion of the finished goods would be used in the marketplace within the nation’s economy to immediately increase the standard of living as well as encourage consumption. The other portion of the finished goods would be exported to the developed nations in return for imports that consist of an even larger variety of raw materials and physical capital. This larger variety of raw materials and physical capital would allow the nation to diversity and grow its economy even further. After that, Step 2 continues to repeat.

 

trade flowchart

Figure 1

As mentioned before, this step by step process is very similar and much inspired by the flying geese paradigm. The flying geese paradigm includes a four stage process of a developing country’s transition to becoming a more developed nation. Within the four stage process, there is a transition from the country largely exporting primary goods to consumer goods and then eventually capital goods (THE ASIAN DEVELOPMENTAL STATE AND THE FLYING GEESE PARADIGM 2013). As explained in the four-state process, this process happens by starting out with importing mostly consumer goods, to eventually importing consumer goods, capital goods, and raw material, so that the country can produce capital and consumer goods themselves (THE ASIAN DEVELOPMENTAL STATE AND THE FLYING GEESE PARADIGM 2013).

A main key difference between the process described by the flying geese paradigm and the process described by this paper, is this paper suggests that at the very beginning process, there should be a more sudden transition to importing more raw materials, capital, and primary goods, as opposed to more gradually shifting to importing these goods as explained by the flying geese paradigm. This can hopefully speed up the process of a country becoming more industrialized and diversified and becoming a developed nation. This is especially suggested towards developing countries that are not already reliant on imports as their major source for consumer goods. However, it would still be recommended that a small amount of imports still consist of finished goods to occupy for the time being, as it may take time for the developing nation to begin to successfully produce their own finished goods to occupy their consumers.

 

 

 

 

 

Works Cited

Whitman, S. (2008). World poverty. New York, Ny: Facts On File, Inc.

Poverty, Inc. (2014). amazon.com. Retrieved from    https://www.amazon.com/Poverty-Inc-George-Ayittey/dp/B01AZ1CG1E

‌Kojima, K. (2000). The “flying geese” model of Asian economic development: origin,

theoretical extensions, and regional policy implications. Journal of Asian Economics,

11(4), 375–401. https://doi.org/10.1016/s1049-0078(00)00067-1

http://www.grips.ac.jp/forum/module/prsp/FGeese.htm.

‌THE ASIAN DEVELOPMENTAL STATE AND THE FLYING GEESE PARADIGM. 2013,

https://unctad.org/en/PublicationsLibrary/osgdp20133_en.pdf.

A New Hypotheses for the Underlying Causes of the Business Cycle

Brennan Dwyer

 

 

In Macroeconomics, the business cycle is a very important concept to study and understand. Throughout the history of the U.S economy and with numerous other economies, there have been boom and bust cycles. These can be described as fluctuations between times of strong economic growth and more prosperity, and times of weak or even declining economic growth and little prosperity. The business cycle includes major changes in the unemployment rate, the credit cycle, changes in real and nominal GDP, as well as many other important economic factors.

This paper presents the hypothesis that there are two primary causes for the economic downturns within the business cycle:

1. Once the economy reaches close to a full employment rate and when real GDP is at or close to potential GDP, then businesses don’t end up producing and growing nearly as quickly as they and the lenders predicted. This leads to businesses having to default on their loans and lay off workers. This not only leads to a higher unemployment rate and a decreased amount of output, but also problems within the financial sector due to the higher delinquency rate of loans, which could lead to a financial crisis.

2. Sometimes when the unemployment rate decreases, (which often may not be close to full employment in this scenario), workers end up demanding higher wages, which leads to cost push inflation from the businesses having to pay higher wages, and demand-pull inflation from the higher incomes being used to consume more goods and services. This likely causes inflation and leads to an economic downturn.

Both suggested causes of economic downturns within the business cycle from the hypothesis can be proven with empirical evidence shown in this paper.

Figure 1 shows strong empirical evidence for the first suggested cause of an economic downtown. Figure 1 is a line graph that shows the relationship between the civilian unemployment rate and the delinquency rate on commercial and industrial loans, from April 1987 through July 2017. This line graph helps prove that once the unemployment rate reaches a very low point and when the economy is likely close to full capacity, businesses end up having to default on their loans due to not being able to continuously hire more workers to expand out and pay back the loans. This can clearly been show in several of the recessions during the time period of this data, such as the 2001 recession and the 2008 recession. However, the recession in the early 1990s could have likely been caused by the second suggest cause of an economic downturn.

business cycle paper 1
Figure 1- Line graph of the relationship between the civilian unemployment rate and the delinquency rate on commercial and industrial loans, from 1987-04-01 through 2018-07-01.
Data used from “fred.stlouisfed.org”

 

Another piece of evidence for the first suggested cause of an economic downturn can be shown in Figure 2. Figure 2 is a scatterplot graph of the quarterly percent change in the civilian unemployment rate (as the x-axis) and the delinquency rate on commercial and industrial loans (as the y axis), from July 1987 to July 2018. This scatterplot graph has a linear R-value of 0.3172, which is a strong R-value for a percent change scatterplot graph. The upward trend can likely be explained by the fact that once the economy is close to its fullest capacity with an almost full employment rate, then the delinquency rate of loans goes up, which causes businesses to lay off workers.

business cycle paper 2
Figure 2- Scatterplot graph of the quarterly percent change in the civilian unemployment rate and the delinquency rate on commercial and industrial loans, from 1987-07-01 through 2018-07-01.
Data used from “fred.stlouisfed.org”

Figure 3 shows strong empirical evidence for the second suggested cause of an economic downtown. Figure 3 is a scatterplot graph of semiannual percent changes in the compensation of the employees (as the x axis), and the Consumer Price Index (as the y axis). The data is from 1960-07-01 through 2018-01-01. With a linear R-value of 0.2915, that would likely be considered a good R-Value for a scatterplot in percent change. It is important to bear in mind that the 1970s and 1980s experienced higher inflation then from the 1990’s, the 2000’s and the 2010’s. It is possible that the recessions during the 1970’s and 1980’s time were more likely to be caused by the second suggested cause of an economic downtown.

business cycle paper 3

Figure 3- Scatterplot graph of the semiannual percent change in the compensation of employees, and the consumer price index for all items (index 2015 = 100). The data is from 1960-07-01 through 2018-01-01.
Data used from “fred.stlouisfed.org”

 

 

Works Cited
U.S. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, December 24, 2018.
Board of Governors of the Federal Reserve System (US), Delinquency Rate on Commercial and Industrial Loans, All Commercial Banks [DRBLACBS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DRBLACBS, December 24, 2018.
U.S. Bureau of Economic Analysis, Compensation of Employees, Received: Wage and Salary Disbursements [A576RC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A576RC1, December 24, 2018.
Organization for Economic Co-operation and Development, Consumer Price Index: Total All Items for the United States [CPALTT01USQ661S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPALTT01USQ661S, December 24, 2018.

A Logical Explanation for the Impossibility of using Natural Numbers to Find a Pattern Amongst Primes and Composites

Brennan Dwyer

 

Since near the beginning of the study of mathematics, prime numbers have continuously frustrated mathematicians, especially regarding the distribution behind prime numbers. They are often considered to be the ‘atoms’ of numbers, and their distribution may be very important not only for pure mathematics itself, but also in the realm of computer science, specifically with encryption. Even the Reimann hypothesis, which is often considered to be one of the biggest unsolved problems in mathematics, involves the distribution of prime numbers. Composite numbers are also an important aspect of number theory and mathematics, especially regarding our understanding of prime numbers. An important fact about composite numbers is that they are always the product of prime numbers. This paper attempts to logically prove that it is impossible to successfully use natural numbers to attempt to find a pattern amongst prime and/or composite numbers. Though this paper doesn’t provide an underlying pattern or explanation behind the distribution of prime or composite numbers, it does potentially help to prove that it is impossible to find an underlying pattern or explanation by just using natural numbers.

With the exception of the number 1, all natural numbers can be broken down into two specific categories: primes and composites. To prove the claim of this paper, it is important to begin to visually examine the relationships between primes and composites, as given with the equations down in figure 1. Before going farther into depth, it is important to first note two obvious facts. The first fact is that all composite numbers are made up of primes numbers, hence the earlier term of prime numbers being the ‘atoms’ of numbers. The second fact is that the LCD (Least Common Denominator) of any composite number is always a prime number.

 

Figure 1:

figure 1 math

P = Prime C = Composite

 

The top equation shows the following process: First start out with a fraction made up of two prime numbers. Then multiply both prime numbers by the numerator of the fraction, which then results in a second fraction made up of two composite numbers that are the same ratio as the first two prime numbers. Finally, this process leads to a ratio of two composite numbers that cannot equal another two prime numbers. The logic behind why the first ratio of two composite numbers in figure 1 cannot equal the next ratio of two prime numbers to the right of them is because the first two composites are the products of the first two primes being multiplied by the numerator of the first two primes.

The middle equation in Figure 1 is simplified more then the top equation by not showing the process of each fraction of two prime numbers being multiplied by the prime that is the numerator. This makes the relationship between the primes and composite numbers more obvious.

The bottom equation in figure 1 is simplified even further then the middle equation by taking out all the composite numbers that are the same ratio as the fraction of prime numbers to the left of them. With this bottom equation being simplified all the way down to just the prime numbers, this shows the obvious relationship between how different prime numbers relate to each other, and how it is impossible for the ratio of one pair of primes to be the same as the ratio of another pair of primes.

These previous set of equations prove how if there is any attempt to find a pattern with prime numbers by using multiplication or division with prime or composite numbers in any manner, there will never be a similarity or pattern. It is important to remember that with the exception of the number 1, all natural numbers can be broken down into two specific categories: primes and composites. Also, the ratios between the primes will be rational numbers.

Even if addition or subtraction was used as an attempt to find some sort of self-similarity or pattern amongst primes or even composites, this is impossible, considering what is shown in Figure 2.

Figure 2:

figure 2 math

P = Prime x = Any natural number

 

As seen in the equations in figure 2, if you start out with a fraction that contains two prime numbers, then add or subtract ‘x’ (which can be any natural number) on the denominator, you can never end up with the same ratio as another two pair of primes. Considering the ratio between two primes cannot equal the ratio of another two primes as proved from figure 1, even if the denominator of the fraction of the first two primes has ‘x’ added or subtracted to it, the numerator is still the same. This means that even if the denominator and x are added together to become another prime number, since the numerator is still the same prime number as it was before, even with adding ‘x’ the ratio between the two primes can never be the same ratio as another set of two primes. The same rules would apply if instead of adding or subtracting ‘x’ from the denominator, it is added or subtracted from the numerator.

Considering the evidence shown in this paper that different pairs of prime numbers can only produce certain other composite numbers, and how there can be no self-similarity amongst the primes themselves or between different pairs of primes and composites, this leads to the fact that even if there was an attempt to use the composite numbers to help find any patterns amongst the prime numbers, this couldn’t work. This is due to all the composite numbers being unique as shown in the equations in this paper. Even using addition or subtraction as an operator couldn’t ever work for finding any case of self-similarity or universal pattern for the primes. Therefore, this all leads to the conclusion that you cannot use natural numbers to ever discover a pattern amongst the primes and/or composites.

 

A Purely Logical Theory for God’s Plan


Brennan Dwyer

One of the first thoughts that usually comes to people’s mind when they hear the term “God”, is something biblical or theological. In society, people are often on one of two sides in belief, with one side being theist and religious, and the other side being atheist and non-religious. This paper takes an alternative stance; that theoretically there is a purely logical and almost mathematical concept behind what God’s plan would be for the human race, and for the greater good.

It is logical to think that God would likely do what maximizes everyone’s well-being, and what is the best possible and most rightful thing to do. Considering how analytical, mathematical, and factual the universe is that everyone observes, it would be logical that God is much similar in character and in thought process to those descriptions of the universe.

With that being said, a big question is how God would go about maximizing everyone’s well-being and creating the best possible plan. This paper states that God would likely stick to these three principles of logic as part of his or her plan:

  1. To form the largest quantity of life.
  2. To maximize the amount of utility the quantity of life experiences.
  3. To have the quantity of life experience the maximized amount of utility over the longest possible period of time, ideally for an infinite period of time. 

In order for God to apply these three principles of logic within his or her plan, (especially within an infinite period of time), it would be logical that there would need to be a finite period of suffering and chaos in order to achieve an infinite period of maximum utility for the quantity of life that is formed. 

This finite period of suffering would act as a temporary habitat for newly formed life, which would eventually die and respawn into some sort of afterlife (infinite period of happiness). The world that acts as a finite period of suffering with a lower amount of utility could logically help achieve God’s plan to have this ideal infinite period of happiness for the quantity of life by acting in the following ways:

  1. To act as a function that randomly spawns an input of a diverse set of life, which eventually outputs towards the infinitely long afterlife.
  2. To act as a place of hardship and suffering, which in turn causes cultures and individuality to form, which could make the infinitely long after-life more interesting.
  3. To act as a school that builds character and maturity amongst the quantity of life, in order to prepare for the infinitely long afterlife.
  4. To act as a place where the quantity of life experiences suffering and a low amount of utility relative to the infinitely long after-life, which subconsciously increases the amount of happiness experienced once the quantity of life reaches the infinity long afterlife.

To have a successful infinitely long afterlife for the quantity of life to experience the maximized amount of utility, there are likely many ways on how it would be different then the world with the finite period of suffering. One way is the senses may be enhanced in a way that brings my pleasure and utility. This can include seeing more vibrant colors, smells, moods, etc. Also, scarcity is likely no longer a problem, therefore each individual lifeform amongst the quantity of life has the ability to do just about anything to their freewill, to own as much land as they want, to not have to work and have everything done for them, etc. In terms of avoiding boredom and the law of diminishing marginal utility, it would be logical to have a set rate of memory loss in the long term, so that new memories and experiences can be formed and be enjoyed.

Though there is no empirical or scientific evidence for the existence of God, this paper has a solid logical explanation for what God’s plan could be, and why everyone may have this finite period of suffering on Earth. It is logical that God probably has a ‘Laissez-faire’ approach to the quantity of life on the finite period of suffering, because otherwise the finite period of suffering would lose its purpose. It can be logically concluded that God’s intentions are likely not just for self-benefit, but rather for the benefit of everyone’s utility, and for the greater good.

Hypothesis for Explaining the Equity Premium Puzzle and the Success of the U.S Stock Market

Brennan Dwyer

 

 

 

Introduction

The equity premium puzzle is one of the biggest and most important unsolved problems in financial economics. It addresses the question of why the U.S stock market has continuously outperformed the returns of U.S government bonds for at least over the past 100 years. The term equity premium is defined as the gap between the returns of the U.S stock market and the returns of U.S government bonds.

Economists have developed different ideas to explain the equity premium puzzle such as the theory that investors get more returns for their willingness to take more risks. Though many economists have attempted to solve the equity premium puzzle, there simply hasn’t been a strong enough explanation provided to solve the equity premium puzzle. For example, as explained by the scholarly article “The Equity Premium: It’s Still a Puzzle” written by Narayana R. Kocherlakota, the growth rate of per capital consumption has been compared with the growth rate of stock returns, with the attempt of trying to explain the puzzle. However, in the paper, “The Equity Premium: It’s Still a Puzzle”, per capital consumption lacked strong correlation with the growth of stock returns, and lacked any logical sense for per capital consumption having causation with the growth of stock returns in the first place. However, in this paper, there is empirical evidence for a more logical variable causing the high growth of the stock market to occur. Also, many other scholarly articles have provided the theory that there has been a risk premium with the stock market due to the high volatility and risk involved, as opposed to government bonds being much more stable. However, this risk premium still isn’t nearly high enough of a premium to explain the large difference between stock returns and government bond returns.

This paper will attempt to give a possible solution to the equity premium puzzle, as well as explain why the U.S stock market has performed so well. This paper presents the hypothesis that the U.S stock market has been experiencing demand pull inflation because of the increase in total gross domestic savings over time (in dollars, not percentage of GDP), and there likely isn’t even a premium as a result. Gross domestic savings is defined as GDP minus total consumption.

Demand pull inflation is defined as when the aggregate demand of an economy exceeds the aggregate supply of an economy. In this paper, the term ‘demand pull inflation’ is used for the stock market, since this paper sees the stock market as its own economy, with the terms aggregate demand and aggregate supply being a good way to describe the stock market in this scenario. It is likely commonly agreed upon that within the stock market, the stocks being sold are represented as the supply, and the stocks being bought are represented as the demand.

If, within the long run, there has been an increase in gross domestic savings, it would make logical sense for a large portion of the savings to be used to buy more stocks at higher prices (aggregate demand), which would outpace the amount of stocks being sold in the long run (aggregate supply), thus causing demand pull inflation of the stock market. In other words, this paper has the assumption that a large portion of the increase in gross domestic savings is invested towards the stock market.

 

Analysis of the United States

To prove the hypothesis of this paper, Figure 1 shows a very strong correlation between the gross domestic savings and the market capitalization of listed domestic companies within the U.S over several recent decades. The R-value of the power trendline for Figure 1 is 0.9749. The data for the two variables was collected from “data.worldbank.org”. However, the two separate variables that were collected from this source were put together and analyzed as part of the work for this paper.

 

1 economics paper United States 2.10.19

Figure 1- Scatterplot model of the relationship between gross domestic savings and the market capitalization of listed domestic companies within the U.S from 1980-2016 in current U.S dollars.

Data used from “data.worldbank.org”

 

Despite the observation that in Figure 1 the gross domestic savings are not nearly as large in monetary value as the market capitalization of listed domestic companies, this paper has the hypothesis that there doesn’t need to be quite as much of an increase in the aggregate demand for the stock market to match the increase for the total value of the market capitalization. It is logical to assume that many stocks within the stock market aren’t frequently bought or sold and are held onto by certain investors for the long-run, therefore only a certain fraction of the stocks in the stock market would need to be demanded at a higher price to cause the whole market capitalization to go up. In other words, the prices of the stocks are very elastic in response to the increase in demand for the stocks, considering not all stocks are traded at once.

It is important however to bear in mind that the difference in monetary value between the two variables on Figure 1 are not that different in magnitude, with the values for gross domestic savings ranging from 6.53E+11 up to 3.18E+12 in dollars, and the values for market capitalization ranging from 1.26E+12 up to 2.74E+13 in dollars.

 

Analysis of the World

It is important to note that this hypothesis could apply for the world market capitalization as well, considering the correlation that is shown in Figure 2. Though the R-value of the power trendline for Figure 2 is 0.9295, which isn’t quite as high of an R-value as Figure 1, it would still be considered a very high R-value, meaning a very strong correlation.

2 economics paper World 2.10.19

Figure 2- Scatterplot model of the relationship between gross domestic savings and the market capitalization of listed domestic companies for the world from 1980-2010 in current U.S dollars.

Data used from “data.worldbank.org”

 

Analysis of Germany and Japan

It is interesting to note that according to Anomalies: The Equity Premium Puzzle, Germany and Japan have both had strong equity premiums despite certain hardships. In fact, both had a greater equity premium then the U.S had during the 20th century (Siegel & Thaler, 1997). Both Japan and Germany have had a strong correlation between gross domestic savings and market capitalization. Shown below in Figure 3 is gross domestic savings and the market capitalization of listed domestic companies within Japan, and on Figure 4 is the same variables for Germany.

Figure 3 had a strong R-value of the power trendline of 0.8025. Figure 4 also had a strong R-value of the power trendline of 0.9188.

3 economics paper Japan 2.10.19

Figure 3- Scatterplot model of the relationship between gross domestic savings and the market capitalization of listed domestic companies for Japan from 1975-2016 in current U.S dollars.

Data used from “data.worldbank.org”

 

4 economics paper Germany 2.10.19

Figure 4- Scatterplot model of the relationship between gross domestic savings and the market capitalization of listed domestic companies for Germany from 1975-2017 in current U.S dollars.

Data used from “data.worldbank.org”

 

Gross Domestic Savings and Dividends

A criticism that may come up for the hypothesis that the stock market has been inflating in prices due to demand pull inflation from the increase in gross domestic savings, is how dividends could keep up in relation to the value of stocks if that hypothesis was correct. However, a solution to that potential criticism can be found on Figure 5, which shows the relationship between gross domestic savings and the net dividends for the U.S from the years 1980-2016.

Figure 5 proves that public companies have managed to pay a large enough amount of dividends to keep up with the increase in gross domestic savings. It is important to remember that this paper states that gross domestic savings is likely the main source behind the demand-pull inflation of the U.S stock market. Therefore, as the increase in gross domestic savings causes the aggregate demand for stocks to increase over time, public companies have managed to increase their dividends to keep up with the increase in prices of stocks.

5 economics paper dividends 2.10.19

Figure 5- Scatterplot model of the relationship between gross domestic savings and net dividends for the U.S from 1980-2016 with gross domestic savings in current U.S dollars and net dividends in dollars.

Data used from “Federal Reserve Bank of St. Louis”

 

Why Individuals May Still Invest in the Stock Market

Finally, it is important to logically examine why individuals still invest in the stock market as opposed to the bond market, despite the idea that the stock market may simply be inflating in value due to the increase in gross domestic savings. It would be logical to assume that individuals are not aware of the possibility that demand-pull inflation has been causing the stock market to go up in price over the long term, especially considering that it’s a relatively new idea. It is important to take note of the market efficiency hypothesis. The market efficiency hypothesis revolves around the idea that stock prices reflect all available information (Malkiel, 2003). As people quickly gain information, the stock prices end up being affected as a result of that available information (Malkiel, 2003). If the market efficiency hypothesis holds true, then it would be logical that as many individuals may not be reacting to the demand-pull inflation idea due to a lack of awareness of it, then they may still feel that they have a purpose to invest in the stock market which may continue to cause the prices to go up.

 

Conclusion

In conclusion, this paper has the hypothesis that the U.S stock market has been experiencing demand pull inflation because of the increase in total gross domestic savings over time. From a logical standpoint this could explain that the premium in the equity premium is likely only occurring due to the demand-pull inflation of the U.S stock market, with the demand pull inflation being a result of the increase in gross domestic savings. That could even mean that there simply isn’t a premium. Again, this paper has the assumption that a large portion of the increase in gross domestic savings is invested towards the stock market.

Though there has been a frequent criticism regarding the possibility of spurious relationship being shown within the empirical evidence presented in this paper, it would be logical that the variables are related, and that there would be a cause and effect with the gross domestic savings and the market capitalizations. However, future research could go towards proving that there aren’t spurious relationships within this paper.

 

 

 

Works Cited

Gross Domestic Savings (Current US$). data.worldbank.org/indicator/NY.GDS.TOTL.CD?end=2016&locations=US&start=1980&view=chart.

Market Capitalization of Listed Domestic Companies (% of GDP). data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS?end=2016&locations=US&start=1980.

Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives, 17(1), 59-82. doi:10.1257/089533003321164958

Siegel, J. J., & Thaler, R. H. (1997). Anomalies: The Equity Premium Puzzle. Journal of Economic Perspectives, 11(1), 191-200. doi:10.1257/jep.11.1.191

The Equity Premium: It’s Still a Puzzle | Narayana R. Kocherlakota | Academic Room,  http://www.academicroom.com/article/equity-premium-its-still-puzzle.

U.S. Bureau of Economic Analysis, Corporate Profits After Tax (without IVA and CCAdj) [CP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CP, November 10, 2018.

 

 

 

Hypothesis for Explaining the Equity Premium Puzzle and the Success of the U.S Stock Market (First Draft)

Brennan Dwyer

 

 

The equity premium puzzle is seen as one of the biggest and most important unsolved mysteries in financial economics. In summary, the equity premium puzzle is the unsolved mystery of why the U.S stock market has continuously outperformed the returns of U.S government bonds for at least over the past 100 years. The term equity premium is defined as the gap between the returns of the U.S stock market and the returns of U.S government bonds. Economists have tried to rationalize the equity premium puzzle through different theories such as the theory that investors get more returns for their willingness to take more risks. Though many economists have attempted to solve the equity premium puzzle, there simply hasn’t been a strong enough explanation provided to solve the equity premium puzzle. This paper will attempt to give a possible solution to the equity premium puzzle, as well as explain why the U.S stock market has performed so well.

This paper states the hypotheses that the U.S stock market has been experiencing demand pull inflation because of the increase in total gross domestic savings over time (in dollars, not percentage of GDP), and there likely isn’t even a premium as a result.

Demand pull inflation is defined as when the aggregate demand of an economy exceeds the aggregate supply of an economy. In this paper, the term ‘demand pull inflation’ is used for the stock market, since this paper sees the stock market as its own economy, with the terms aggregate demand and aggregate supply being a good way to describe the stock market in this scenario. It is likely commonly agreed upon that within the stock market, the stocks being sold are represented as the supply, and the stocks being bought are represented as the demand.

If within the long run there has been an increase in gross domestic savings, it would make logical sense for a large portion of the savings to be used to buy more stocks at higher prices (aggregate demand), which would outpace the amount of stocks being sold in the long run (aggregate supply), thus causing demand pull inflation of the stock market. In other words, this paper has the assumption that a large portion of the increase in gross domestic savings is invested towards the stock market.

To prove this hypothesis, Figure 1 shows a very strong correlation between the gross domestic savings and the market capitalization of listed domestic companies within the U.S over several recent decades. The data for the two variables was collected from “data.worldbank.org”. However, the two separate variables that were collected from this source were put together and analyzed as part of the work for this paper.

equity premium puzzle picture

Figure 1– Scatterplot model of the relationship between gross domestic savings and the market capitalization of listed domestic companies within the U.S from 1980-2016 in dollars.

Data used from “data.worldbank.org”

 

Despite the observation that in Figure 1 the gross domestic savings are not nearly as large in monetary value as the market capitalization of listed domestic companies, this paper has the hypothesis that there doesn’t need to be quite as much of an increase in the aggregate demand for the stock market to match the increase for the total value of the market capitalization. It is logical to assume that many stocks within the stock market aren’t frequently bought or sold and are held onto by certain investors for the long-run, therefore only a certain fraction of the stocks in the stock market would need to be demanded at a higher price to cause the whole market capitalization to go up.

It is important however to bear in mind that the difference in monetary value between the two variables on Figure 1 are not that different in magnitude, with the values for gross domestic savings ranging from 6.53E+11 up to 3.18E+12 in dollars, and the values for market capitalization ranging from 1.26E+12 up to 2.74E+13 in dollars.

In conclusion, this paper has the hypothesis that the U.S stock market has been experiencing demand pull inflation because of the increase in total gross domestic savings over time. From a logical standpoint this could explain that the premium in the equity premium puzzle is likely only due to the demand pull inflation of the U.S stock market, with the demand pull inflation being an result of the increase in gross domestic savings (in dollars). That could even mean that there simply isn’t a premium. Again, this paper has the assumption that a large portion of the increase in gross domestic savings is invested towards the stock market.

 

 

 

Works Cited

Gross Domestic Savings (Current US$). data.worldbank.org/indicator/NY.GDS.TOTL.CD?end=2016&locations=US&start=1980&view=chart.

Market Capitalization of Listed Domestic Companies (% of GDP). data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS?end=2016&locations=US&start=1980.