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).


fischer1Fed vice chairman Stanley Fischer, one of the keynote speakers at the Jackson Hole conference – more on him further below

Photo credit: Simon Dawson/Bloomberg


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.


JesusHuertaDeSotoJesus 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:


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.

As Frank Hollenbeck wrote last year:


“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.”


(emphasis added)

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:


1-5 yr. inflation breakevensUS 5 year inflation breakevens (calculated by comparing the yields of regular and “inflation-protected” treasury securities – click to enlarge.


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).


2-unemployment claimsInitial unemployment claims – their low level is actually a warning sign, as counter-intuitive as that may seem – click to enlarge.


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.”


(emphasis added)

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.


3-debt,debt and GDPThe 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



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5 Responses to “Jackson Hole – Meeting of the Physics Envy Brigade”

  • HonestlyExpressingYourself:

    Acting Man at its best!

    Of course no-one knows what a totally free market would be like, but at least in theory it would be superior, and in practice we’ve had decades of centrally planned financial markets not doing us any favours – so if I could vote for it I would.

    Perhaps the enduring popularity of central bankers is down to the average Joe’s need to believe in ‘powerful men’, like the old emperors that were held responsible for the weather. Despite obviously terrible track records people still believed them. Of course that passing of agency to another creates massive moral hazard: if people hadn’t been so enamoured of the Fed, wouldn’t they have been more careful in looking after their own finances and savings? Smiling faces of Fischer, Bernanke, and Greenspan make people think they are being looked after – but it’s a lie.

  • Kreditanstalt:

    Perhaps you have too much trust in government statistics? “Initial unemployment claims” are a decaying phenomenon; these days, even working a sufficiently ‘legitimate’ “job”, registered, tax-deducted and “insured”, is more difficult. Many young people in particular would LOVE to find such an insurable position but must content themselves with unremunerated bona fide unemployment, insufficient hours part-time work, hiding in school, under-the-counter-paid casual hours or any of dozens of serf-appropriate set-ups.

    It’s getting harder and harder to “make an initial claim”, in other words, so the stat covers a now-small section of the wealthier employed…usually those in big, measurable “companies”.

    But that’s no longer the real economy.

  • TheLege:

    “I doubt they and government are done flogging the “free” market for their failures.”

    This may be true, but I have a feeling that there will come a time when the politicians are taking so much flak for deteriorating economic conditions that they will simply turn on the central bankers and hang them out to dry.

    Those aforementioned groups may be ‘cosy’ right now but when the heat comes on …

    • zerobs:

      We could watch Greece as an indicator.

      My guess is we’ll just get calls for new central bankers, and then we’ll revert to the Treasury taking over the Fed.

      And there’s always the chance of fomenting a war panic to make everyone forget about the government theft.

  • RedQueenRace:

    “We cannot wait for these charlatans to finally be discredited.”

    You may have to though. I doubt they and government are done flogging the “free” market for their failures.

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