The language for this one comes out of physics. It is a general phenomenon seen in many places. In chemistry the words used are kinetics / thermodynamics.

Equations of Motion - When we understand what causes change in a system, we are able to predict what the state of the system will be in the future given its state now. The rules which dictate the change are called equations of motion, or EOM.

Information Loss - Sometimes, EOM leak information. This means that where it was possible to distinguish between two possible worlds at time t1, you find them indistinguishable at some later time t2. Funnels are a good example of this - when you use a funnel you are able to care less about where the liquid is initially, because it all goes to the same narrow end.

Transience / Steady State - When an EOM discards all the information it has, no matter where you start out you will end up at the same place. Most of the time, however, EOMs don't lose all the information, and the movements which are subject to rubbing out, or friction, are called transient movements, while whatever persists in the long run is called the steady state.

This is an index for an upcoming series of posts on the various dichotomies used to apply abstraction to modeling and problem solving. The list below will gradually be replaced with links.

• Precision / Accuracy
• First Principles / Empirical
• Syntax / Semantics
• Endogeny / Exogeny
• Qualitative / Quantitative
• Subjective / Objective
• Transient / Steady-State; Kinetics / Thermodynamics
• Terminal / Instrumental; Ends / Means
• Induction / Deduction

Each pair of terms is hopefully balanced, being specific to the same degree as the other. The different pairs are not exactly orthogonal, but are hopefully orthogonal enough for the collection as a whole to serve as a typology.

The MIT Alum club in New York organizes an event called finance brunch, which forwarded me this article last weekend:

http://www.truthsetsusfree.com/ModernMoneyMechanics.pdf

There is a blow-by-blow account inside on the mechanics of the balance sheet when a bank makes loans and takes deposits.

The basic idea is this: ΔAssets = ΔLiabilities is always true because it is an accounting identity. However, liquid assets = liquid liabilities is not always true.

When a bank lends out money, it merely creates a number in its ledger. The (asset~liability) pair is (loan~checking account). When the borrower or a depositor withdraws currency, however, it is (reserves~checking account) that is deducted. The reserve requirement is the required ratio of reserves to checking accounts, basically a requirement that banks always be able to pay cash for a certain fraction of its checking account balances.