Planners Meet to Discuss the Impossible
The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the past 20 to 30 years are almost exclusively their doing (some of the responsibility has to be shared by politicians and other bureaucrats, who have hopelessly over-regulated and overtaxed economies, especially in the developed world).
Fed vice chairman Stanley Fischer, one of the keynote speakers at the Jackson Hole conference – more on him further below
In their conceit these supposed “wise men” (we prefer the more fitting term “high IQ morons”, h/t Bill Bonner) seem to believe that bureaucrats can actually plan the economy and will deliver an outcome that is superior to that the free market would provide. In spite of all the evidence to the contrary that has amassed over what are by now centuries, they actually appear to be buying their own BS, which makes them especially dangerous.
As Ludwig von Mises has shown in 1920 already (in his seminal monograph Economic Calculation in the Socialist Commonwealth), central planning of the economy is literally impossible. Mises focused on the lack of a price system once the material factors of production are under government control and no longer freely tradable. Without proper prices, it is impossible to engage in rational economic calculation and hence it is no longer possible to properly allocate scarce resources. One can no longer speak of an economy at all in this case – it will simply disintegrate. Friedrich Hayek later pointed out that central planners can never hope to obtain the required information to correctly “plan” even a single aspect of an ever-changing complex economic system comprising billions of individual actors and their widely dispersed knowledge.
Still later, Jesus Huerta de Soto showed that central banking is a special case of the socialist calculation problem as it pertains to the financial sphere. The theoretical case is unassailable, as decades of intense debate have shown. The empirical confirmation is provided continually by the boom-bust chaos we are witnessing all over the world. It seems rather obvious that if central planning by central banks worked, this chaos wouldn’t exist. The fact that it does exist shows pretty clearly that “scientific monetary policy” remains nothing but a pipe dream of arrogant statist intellectuals.
Jesus Huerta de Soto – building on the foundation provided by Mises and Hayek’s contributions to the socialist calculation debate, he has extended the theorem of the impossibility of socialist calculation to the special case of central banking
Photo credit: cobdencentre.org
A Profession in a Sad State
Most modern-day mainstream economists suffer from an affliction known as “physics envy” – they believe economics should ape the natural sciences in order to be a “proper” science. They have lost sight of the fact that economics is a social science that concerns itself with human action, not lifeless objects. For all their complexity, the mathematical models economists use to help central bankers in their decision-making are essentially utter bunkum. Rarely has as much time and effort been wasted on something as useless and ultimately harmful.
“Economists also have “physics envy” and are enamored with empiricism and mathematical models. To work in a central bank you have to be familiar with, if not a quasi-expert on, DSGE models. The problem with these models, or any economic model, is that the parameters are not constant, most of the variables are interrelated with constantly changing interrelationships and omitted variables, like expectations, some of which being immeasurable, are conveniently assumed away as unimportant. That is like taking a road map of shipping lanes and omitting the islands.
Economics is a social science and techniques borrowed from the physical sciences are simply inappropriate. Since we do not have a laboratory to conduct economic experiments, it is difficult to distinguish between association and causation or correctly determining the direction of causation. Economic activity is based on human actions, with very little empirical regularity. It may be a sunny day, and you have skied for three days. This does not mean you will go skiing on the fourth day. Your actions simply cannot be modeled like the reactions of lab rats in a biology experiment. Unlike the reaction to noise from the zombies in the walking dead, humans do not react necessarily to the same events in the same way. Economists at the Fed must be scratching their heads as to why businesses did not react to lower interest rates as it did after the dot-com bubble. It’s the old adage of “fool me once, shame on you; fool me twice, shame on me.”
When one attains a Ph.D. in physics or medicine, he does not spend time understanding theories from 200 years ago. The profession is always moving forward, right? In economics, we wrongly take the same attitude. Macroeconomics as a profession has not advanced but has regressed. We had a better understanding of macroeconomics 80 years ago. Politicians put Keynes on a pedestal because he gave them the theoretical foundation to justify policies that had been justifiably ridiculed in the past by the classical economists.”
One of the keynote speakers at the conference will be Fed vice chairman Stanley Fischer. We can already guess from the topic of his speech that it will be an occasion to advocate even more easy money, as he will talk about “US inflation developments”. By this he means developments in consumer prices, not actual money supply inflation. As we have recently pointed out, US inflation expectations have been sliding again lately (see: “US Inflation Expectations Decline Sharply” for details).
Given the Fed’s nonsensical “inflation targeting” policy (it is this policy that is the major driver of the boom-bust cycles of recent decades and the ongoing credit bubble), it should soon begin to increase its monetary pumping efforts again:
We expect that stock market participants and assorted cronies will be happy with what he has to say, unless he keeps insisting that the decline in inflation expectations is a “transitory” phenomenon (which it actually is). In any case, it seems highly likely to us that the Fed will begin to climb down from its long announced rate hike plans in light of recent financial market volatility. More of the same will be required for it to take the next logical step, namely starting “QE4”. Possibly the necessity to fulfill the Fed’s other nonsensical mandate – absurdly, the central bank is supposed to provide “full employment” by tweaking an overnight interbank lending rate – will have to rear its head again as well before QE4 begins.
The chances of that happening are actually better than one would think. Typically weekly unemployment claims decline to extremely low levels relatively shortly before the economy dips into recession (the lead time varies). This seemingly contradictory datum can be explained by the fact that companies tend to “hoard” workers as a boom peaks (h/t Lee Adler, who argues that employers are in an “advanced state of delirium and delusion”). It is of course well-known that employment is a lagging economic indicator, which makes it all the more ironic that it is used as a major input for allegedly “forward-looking” monetary policy decisions. We say “allegedly” because it is clear from experience that the Fed’s actions are 100% ad hoc and reactive. They call this method “data dependent”, which sounds better. In reality it is akin to driving a car forward at great speed while having one’s eyes firmly fixed on the rear-view mirror (h/t Steve Saville for this formulation).
Faith in Central Banks – the Next Bubble that will Burst
According to an article by the Fed’s favored press mouthpiece Jon Hilsenrath, central bankers are “facing another economic mess” as they meet at Jackson Hole. Curiously the article fails to mention that it is a mess of their own making, but one should never tire to point this out. The profession “central banker” shouldn’t even exist – ideally, we should have a sound market-chosen money and free banking instead.
Opinions as to what the central bank should do next remain divided – as Ronald Reagan is said to have once remarked, if you ask 100 economists a question, you will get 3,000 answers. Hilsenrath e.g. writes:
“Academics don’t provide clear direction. In competing newspaper opinion pieces this week, Harvard professors Martin Feldstein and Lawrence Summers, who have served as economic advisers to Republicans and Democrats, respectively, argued for and against a Fed rate increase in September.”
Obviously, in an unhampered free market economy, no-one would have to argue for or against rate hikes, as interest rates would simply be set in the marketplace. The bizarre belief that monetary bureaucrats somehow “know” at what level interest rates should be set is actually already disproved by the brief excerpt above. If they “knew”, there wouldn’t be opposing opinions. This is precisely the essence of the socialist calculation problem as it pertains to central banks: they cannot know what interest rate is closest to the natural rate based on society-wide time preferences.
More important though are the increasingly frequent signs that the hitherto near universal faith in the abilities and omnipotence of central bankers is finally fading. This faith is in a sense the “mother of all bubbles” and it seems ready to finally burst. Here are a few excerpts from Hilsenrath’s article indicating as much:
“It is a fraught moment for all of the world’s central banks. China’s repeated efforts to stimulate growth don’t seem to be working. China’s central bank cut interest rates by a quarter percentage point on Tuesday and its stock market fell.
The central banks also face skepticism about the paths they are charting. “Our global economy is fixated on central banks and the latest utterance of the monetary authorities,” said Judy Shelton, senior fellow of the Atlas Network, a free-market think tank participating in a parallel conference critical of the Fed this week, also in Wyoming. The title of her panel, “What Happens if Central Bankers are Wrong?”
Central banks for the major developed economies, including the Fed, responded to the post-financial crisis period of slow economic growth and low inflation by pushing short-term interest rates to near zero and launching bond-buying programs to drive long-term interest rates down, too.
Many central bankers say the economy would have been in much worse shape, possibly a repeat of the Great Depression, without the support. Critics like Ms. Shelton say the policies failed to produce the higher inflation or faster growth desired.”
We still don’t understand why “higher inflation” is considered desirable by anyone, but we are not surprised that central bankers are hewing to the fairy tale that without their money printing we would have suffered a repeat of the Great Depression (no-one can really prove or disprove this, since we cannot go back in time and undo their actions). Perhaps they need to be reminded that the Fed actually expanded its balance sheet by over 400% between late 1929 and early 1933. Somehow, this didn’t keep the depression from happening. It’s the ultimate cover-your-behind strategy though: no matter what calamities befall us next, they simply had to do it!
We wonder how long it will take before people realize that the reason why their efforts are “not working” is the fact that they are actually counterproductive. Economies around the world aren’t suffering in spite of central bank policies, but because of them. By refusing to allow a full scale liquidation of malinvested capital on several successive occasions, central bankers have been instrumental in the creation of an ever larger pile of debt and ever greater capital misallocation around the world. If there is one inescapable conclusion, it is that the piper will have to be paid, no matter what.
We cannot wait for these charlatans to finally be discredited. Unfortunately that is the only good thing we can expect as a result of their machinations.
The US debt-berg and economic output. Note the tiny dip in total debt growth recorded in 2008 – this inconsequential decline in debt was enough to create the “greatest crisis since the Great Depression”. This should give us an idea how extremely fragile the system has become – click to enlarge (Chart, not debtberg)
Charts by: StokCharts, St. Louis Federal Reserve Research
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
5 Responses to “Jackson Hole – Meeting of the Physics Envy Brigade”
Most read in the last 20 days:
- Gold Price Skyrockets in India after Currency Ban – Part III
When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days. Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
- Gold Price Skyrockets in India after Currency Ban – Part II
Chaos in the Wake of the Ban Here is a link to Part 1, about what happened in the first two days after India's government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days. India's prime minister Nahendra Modi, author of the...
- Gold Price Skyrockets in India after Currency Ban – Part IV
A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost. Indian jewelry...
- A Note on Gold and India – What is Driving the Gold Price?
Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption. Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
- Will Trump Do What Reagan Couldn’t?
Depravity and Degeneration BALTIMORE – Finally, it’s over. We were both delighted and appalled by the news. A smile spread over our face... and our steps lightened... as we looked ahead to four years without Hillary Clinton’s know-it-all mug in the news. Praise be! This mug will be largely missing from the airwaves and the intertubes in coming years. And your caption scribbler PT won't have to look for a fall-out shelter! We thank the Lord and the American public for...
- India's Currency Debacle – An Interview with Jayant Bhandari
A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details). Banned 500 rupee banknotes The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
- Inflation Expectations Rise Sharply
Mini-Panic Over Inflation After Trump's Election Victory We have witnessed truly astonishing short term market conniptions following the Donald Trump's election victory. In this post we want to focus on one aspect that seems to be exercising people quite a bit at present, namely the recent surge in inflation expectations reflected in the markets. Will we have to get those WIN buttons out again? A 1970s “whip inflation now” button. The only thing that was actually needed...
- Will the Swamp Swallow Trump?
Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle. Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
- There Are Two Types of Credit — One of Them Leads to Booms and Busts
Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
- All Aboard! Trump’s Express Train to the Future
Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999. Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
- Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then. Initially, gold rallied sharply...
- Too Early for “Inflation Bets”?
The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!” The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...