The State of the Union Address (SOTU)

February 24, 2026 President Donald Trump gave the State of the Union (SOTU) address for the first time in his Second Term. It was awful. In Google AI's summary:

This is not to say that Modern SOTUs have been much better. 

From the standpoint of Systems Theory, the state of a system has many meanings depending on the system being studied and can be confusing. In Political Science, the "State" is the geographic area controlled by a central government--a non-variable.  In Systems Theory, I like the following definition:

The State of a system is the collection of independent variables that explain the past and future path of the system.

As a place to start defining the State of a Political System,  I asked chatGPT to describe what topics should be included in the SOTU:

It's certainly too much to expect that any President would reasonably be able to address all the topics and the ones omitted are most likely the ones where the Administration is failing!

My proposal would be for some entity outside of government to take each of the chatGPT topics separately, and focus on defining and reporting on the state of each subsystem (Economic, National Security, Domestic Policy, Democracy-Governance, and Social Issues) and then forecast the state variables for the Future Vision. The graphic above does this for US1, a summary Economic-Environmental state variable from the USL20 Model (see the full description here).  

Notice that there are alternative futures based on alternative Geopolitical Alignments. Business-as-Usual (BAU) with the US continuing as the World Hegemonic leader produce unending exponential growth. Again, using Google AI:

Since the Trump II Administration seems to be stepping away from the Rules-Based World Order (RBO) there should be a democratic debate about the Trump II Administration's unilateral change in US Geopolitical Alignments. Instead, it is presented as a one-line "America First" slogan in the SOTU without prior Congressional debate or public input. 

For example, the forecast above shows that Geopolitical Alignment with the World System (W) would produce a Steady-State Economy in the US after 2050. Given the Environmental consequences (if not complete impossibility) of unending exponential growth,  the more reasonable idea of Limits to Growth should be debated with wide-spread public input. It is a Future Vision for the US and the World System!

I future posts, I will take each of the SOTU topics and develop a Measurement Model for each that allows the state variables to be forecast. The Measurement Model for the USL20 model is presented below and it should be scaled back to provide a reasonable SOTU Economy Index.

Notes

You can run the R-code for the USL20 Model here.

USL20 Measurement Model

 

 

Inside Colombia's Cocaine Empire

 

Notes

For more information about Colombia

For more information of Mexico, see the Blog Roll here. For information on data sources and how the state space models were constructed, see the Boiler Plate. Code for the MXL20 Model can be run here.

The Geopolitics of Cartels in Mexico

 

Feb 27, 2026 The video above argues that the growth of powerful cartels in Mexico is the result of Geopolitical Conflict between China and the US. Recently, EL Mencho a Mexican Drug Kingpin, was murdered by Mexican authorities with intelligence help from the US. The cartels have taken to the streets in a wave of violence that is just now subsiding.

In this post, a look specifically at how Geopolitical Linkages with China would (or would not) benefit Mexico. Short answer: Geopolitical Linkage with China is the worst possible future for Mexico.

The graphic above shows three alternative futures for growth of the Mexican Economy (MX1) from the MXL20 model. The best future is Business-as-Usual (BAU) that is, no Geopolitical Linkages. The worst future, by far, is Geopolitical Linkage with China (CN) which leads to growth collapse. Continued entrenchment of Cartels in addition to other Chinese Economic Exploitation would damage the country well past the distant future in 2100. 

Since it does not seem that either the US or China will leave Mexico alone to find it's own future (BAU), a reasonable strategy or the Medium-term would be a Random Walk (RW), that is, responding randomly to alternating pressure from the US and Chia. The execution of El Mencho may well be one such random response.

Notes

For more information of Mexico, see the Blog Roll here. For information on data sources and how the state space models were constructed, see the Boiler Plate. Code for the MXL20 Model can be run here.

Why Does the World Bank Think It is Failing?

 

The Economic Institutions formed after the Bretton Woods Conference in 1944 are the International Monetary Fund (IMF), the World Trade Organization (WTO) and the World Bank (WDB).*** These three global organizations were the economic basis of the Rules-Based World Order (RBO). Commentators are now saying (here) the the RBO is finished.

To understand the future of the RBO (or it's replacement, if anything) it would be useful to look at the goals of the underlying institutions and how well they achieved their objectives. The post starts with the World Bank (or World Development Bank, WDB, as it should be named).

Since the 2024 Poverty, Prosperity and Planet Report: Pathways Out of the PolyCrisis, the WDB has been involved in some soul-searching, particularly with regard to Extreme Poverty.

Using Figure 1 above, the WDB argues that extreme poverty has stagnated.

Using my own data and models

Notes

*** The  World Bank does not have an agreed-upon acronym possibly because it is not a "bank" in the usual use of the term. It does not accept deposits, invest member funds and return interest. It is actually a World Development Bank (WDB) that is tasked with helping Developing Countries increase economic growth. The actual goals, according to Google AI are:

 

Input Indicators Codes

Input Measurement Model

Input Time Plot

Output Measurement Model

Output Time Plot

WL20 Hardship Indicators

Predicting and Controlling HyperInflation in Venezuela

In a prior post (here) I presented one measure of Inflation in Venezuela (NY.GDP.DEFL.KD.ZG from the World Development Indicators) with an attractor path and 98% Bootstrap Prediction Intervals.** The graphic above shows that there were two periods (the 1970s Energy Crisis and the 1994 Caldera Banking Crisis) where inflation spiked well above the upper 98% prediction interval. Interestingly enough, during the Chavez Period, inflation was well below the lower 98% prediction interval. What might we expect for the period after Hugo Chavez died in 2013 and his predecessor Nicolas Maduro came to power?

In the graphic above, I extend the Inflation data (using another GDP Deflator** from the World Development Indicators). For most of Maduro's reign, inflation seemed under control. Then in 2020 it started to take off and went exponential around 2025. Maduro was removed from power as a result of a US Invasion on Jan 3, 2026.

President Trump has said that, possibly for years, the US will run Venezuela. One of the most pressing problems is to get hyperinflation under control. It will not be easy. ChatGPT concludes:

Any prediction about what might happen to the Venezuelan economy in the future will be very uncertain.

Notes

** Inflation is usually presented as percentage changes in the GDP Deflator. For technical reasons, I do not use the conventional measure in statistical estimation. Change scores, Q(t) + E(t) - Q(t-1) - E(T-1), contain error, E. In time series data, the errors are unlikely to cancel and are typically not normally distributed and will not cancel in probability. The regression coefficient, B,  for a time series model of the deflator, DEFL(t) = a + B DEFL(t-1) + E(t-1) is better estimate of deflation and is free of error,  E(t-1).

Maduro Removed from Power

The Taylor Rule and US Economic History

 

In a previous post (here), I present four regimes for Automating Fed decision making. Three of the regimes are designed to control the Federal Funds Rate (FFR) during crisis. All four regimes need to be compared to the Taylor Rule, a single equation loss function for controlling the FFR (see graphic above) and other proposed rules for the FFR.

The tracking for the FFR (red line in the graphic above) and the Taylor Rule (blue line) is pretty good but not perfect, particularly in the periods after crises (1950-55, 1970-75, 1980-1990, 200-2010 and 2020 to the present).

Notes

FOMC Measurement Model

FOMC AIC

Notes

FED Index

FED Structural Model

Trump vs. the Federal Reserve: Part II

 

In a prior post (here), I concluded that Both Trump II and the Federal Reserve (the Fed) are right: Interest rates are too high and they can't be lowered given the economic uncertainty of Trump II policies. So, from the graphic of the Federal Funds Rate (FFR, the Fed's primary policy tool), interest rates need to get down to the attractor path from the USL20 model, but we are still way above the 98% prediction interval for the attractor path. From the perspective of Systems Theory, the attractor path graph brings up the question of how good a controller has the FED been historically?

From the perspective of Cybernetics, which likes to think in terms of control bands, the Fed has been an Erratic-Controller going sharply outside the 98% predication intervals for most of the Late 20th Century. Prior to 1970, manipulation of the Fed Funds Rate (FFR) had little impact.

There some very interesting departures from the Attractor path during the Late and Long 20th Century. Essentially, the Fed was an integral part of history during the period (see the Notes and the Readings): (1) The Vietnam War, (2) The Arab Oil Embargo, (3) The Great Inflation and the Volker Deflation, (4) The Great Moderation, (5) The COVID-19 Pandemic and (6) The Rebound (Post-COVID Inflation).

In order to evaluate FED performance, we need a model for predicting the Fed Funds Rate (FFR). I have three models, one driven by the USL20 model, another driven by the WL20 model and a Business-As-Usual (BAU) model. The USL20 model is a strong model (using the Akaike Information Criterion, AIC) but the model is unstable (I'll comment on that below) so I have used the WL20 model as input because it is stable and provides an interesting counterfactual path. The attractor path (conducting a free simulation starting at 1950) shows two periods: (1) The Pre-Volker Deflation (before 1980) and (2) The Modern Fed after 1980. 

In the Vietnam- and the Oil Crisis-periods, the attractor path suggests that the Fed needed to do more, increasing the FFR to stop Inflation before it started. After 1980, the Fed was responding to World-System signals, manipulating the FFR to deal with crisis (a little late in 1990, during the Dot-Com Bubble).

In spite of reasonable policy prescriptions from the USL20 model and  the WL20 model, the BAU model is still best given the AIC statistics. The model suggests agin (graphic above) that the Vietnam-period needed higher interest rates, but after that the model calls for a steady state FFR path.

What are we to make from the predictions of these three FFR models and the History of the Late (and Long) Twentieth Century):

• Fed policy actions (at least the FFR) are erratic. All the models call for smoother policy responses. For political reasons, the Fed may feel it has to make strong (rather than gradual) statements.
• The Fed seems to have found it's footing after the Volker Deflation, but then had to improvise through the Subprime Mortgage Crisis.
• If the US Economy and the World System are reaching a Steady State, where there is strong political pressure to lower interest rates an stimulate growth (even though rates are close to the Zero Lower Bound, ZLB), the FED may be forced to use the BAU (or even a Random Walk, RW) model to avoid political pressure.

Do we have a good idea what drives Fed policy? I'm not sure. However, there is one more "Structural" model we can look at (AIC = -455.7) that creates a Cybernetic Reaction function for the Fed mandate and uses it to drive policy. I"ll look at that more in another post (here).

For the present, the future of Fed policy actions will be hard to predict but we can continue studying counterfactual alternatives and watch what happens in the real world. 

Notes

• The Vietnam War (1965-1973)
  
  
  
  
  
• The Arab Oil Embargo (1973-1974) 
  
  
  
  
  
• The Volker Deflation (1979) 
  
  
  
  
  
• The Great Moderation (1985-2005)
  
  

  

  
  
• COVID-19 Pandemic (2020)
  
  
  
  
  
• COVID Rebound (2023)
  
  
  

Readings

• The FED Overview: History of the Federal Reserve
• The Collector The Economic Effects of the Vietnam War
• NY Times What Vietnam Did to the American Economy
• Columbia SIPA The 1973 Oil Crisis: Three Crises in One--and the Lessons for Today
• INET Oil and the Energy Crisis: A Reanalysis
• FRB The Great Inflation and the Volker Disinflation
• St. Louis Fed The Volker Tightening Cycle
• The Fed The Great Moderation: 1982-2007
• The Fed Monetary Policy and the Housing Bubble
• The Fed The Great Recession December 2007 - June 2009
• The Fed The Subprime Mortgage Crisis 2007 - 2010
• US Treasury COVID Economic Relief
• Brookings The US Recovery from COVID-19
   

USL20 FFR 2026 Model

USL20 Measurement Model

WL20 FFR 2026 Model

WL20 Measurement Model

FFR Models AI Statistics

FFR Model BAU