Meltdown

MIAMI – On Thursday, the Dow rose 79 points – or about 0.5%. Nothing proved one way or the other. We told you about our visit with President Reagan’s former budget advisor and Wall Street veteran David Stockman.

 

Must-should-ought-large1Ought!

 

Unlike almost every other analyst or investor we know, David has been a true insider. He has seen how the system really works from within. He played critical roles at critical moments – in Washington and on Wall Street.

 

1-SPXS&P 500 Index: David Stockman’s positions are benefiting at the moment

 

So he understands, maybe better than anyone, how the game is played… and how the deck is stacked to favor the insiders, the elite, the cronies, and the Deep State.

David was cheerful when we met him on Wednesday. He makes “bubble finance” trades – shorting stocks that are overpriced, overhyped, and overdue a slide. Lately, he’s been making good money. And he’s looking forward to better times.

The cronies have gone about as far as they can, he said. He expects the markets to melt down and the credit bubble to burst – soon – marking the end of the Bubble Epoch. We’re not so sure…

The Deep State depends on bubble finance. It won’t give it up without a terrific fight. If the Bubble Epoch goes, it will be over the Deep State’s dead body. Which is the way we’d like it. But it won’t be smooth, easy, or fast.

Negative rates? A ban on cash? Helicopter money? Direct intervention in the markets? Depression? Hyperinflation? Dow 36,000? We’ll probably see it all before this is over.

And now… a Friday classic from the archives…

 

They Oughtta Know

[Ed note: Originally published January 9, 2003]

Today, we take another look at “ought” – and hope to discover more of life’s secrets. If “Ought” were a person, it would not be a bartender or a good-hearted whore. Ought is not the kind of word you would want to hang out with on a Saturday night… or relax with at home – for it would always be reminding you to take out the trash or fix the garage door.

If it were a Latin noun, Ought would be feminine, but more like a wife than a mistress. For Ought is judgmental… a nag, a scold. Even the sound of it is sharp. It comes up from the throat like a dagger and heads for soft tissue, remembering the location of weak spots and raw nerves for many years.

“Yes, I ought to have begun saving money for our retirement a long time ago,” you tell her.

“You’re right… I ought to have finished college. And I ought to have stopped after the third shot of Jack Daniels.”

Ought is neither a good-time companion nor a boon buddy, but more like the I-told-you-so who hands you aspirin on Sunday morning… tells you what a fool you were… and warns you what will happen if you keep it up.

“You get what you deserve,” she reminds you.

 

A Dullard, a Wimp, and a Wuss

A man who lets himself be bossed around by Ought is no man at all. He is a dullard, a wimp, and a wuss – a logical, rational, reasonable lump. Thankfully, most men, most of the time, will not readily submit. Instead, they do not what they ought to do, but what they want to do.

Stirred up by mob sentiments or private desires, they make fools of themselves regularly. Besides, they can’t help themselves. Of course, Ms. Ought is right: They get what they deserve. But sometimes it is worth it.

Modern economists no longer believe in Ought. They don’t appreciate her moral tone, and they don’t like it when she wags her finger at them. To them, the economy is a giant machine with no soul, no heart… no right and no wrong. It is just a matter of mastering the knobs and levers.

 

20130921_BRD001Since early in the 20th century economists have dreamed of “improving” the economy by means of central planning – since they of course “know better” than the market!

Cartoon by Claudio Munoz

 

The nature of the economists’ trade has changed completely in the last 200 years. Had he handed out business cards, Adam Smith’s would have borne the professional inscription: “Moral Philosopher,” not “Economist.”

Smith saw God’s “invisible hand” in the workings of the marketplace. Trying to understand how it worked, he looked for Oughts everywhere. Everywhere and always, people get what they deserve, Smith might have said. And if not… they ought to!

Today, the “Ought To” school of economics has few students and fewer teachers. Only here at the Diary is the flame still alive, flickering. Most economists consider it only one step removed from sorcery.

“Call it the overinvestment theory of recessions of ‘liquidationism,’ or just call it the ‘hangover theory,’” Paul Krugman began his critique of the Ought To school.

“It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion…”

 

Perversely Seductive

“The hangover theory is perversely seductive – not because it offers an easy way out but because it doesn’t,” he continued in his December 1998 attack.

“It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. Powerful as these seductions may be, they must be resisted, for the hangover theory is disastrously wrongheaded…” he concluded. In Krugman’s mechanistic world, there is no room for Ought.

 

krugnuts-apocolypseIt is hard to believe that Mr. Krugman actually won a Nobel Prize in Economics. The above cartoon alludes to the fact that after the WTC attack, he seriously argued in his NYT column that the devastation had a “good side” as it would produce “economic stimulus”. Calling such a view economic ignorance runs the risk of insulting the term “ignorance”.

 

If the monetary grease monkeys of the Great Depression of the 1930s or of Japan in the 1990s failed to get their machines working properly, it was not because there are any invisible hands at work or any nagging moral principles to be reckoned with… but because they failed to turn the right screws!

It is completely incomprehensible to him that there may be no screws left to turn… or that the mechanics might inevitably turn the wrong screws as they play out their roles in the morality spectacle. Krugman is hardly alone.

 

krugpot-1Dilbert’s boss gets lectured by the master

Cartoon by Scott Adams

 

As the 20th century developed, mass democracy and mass markets gradually took the Ought out of both politics and markets. By the end of the century, investors no longer cared what interest rates ought to be… and voters no longer felt that the U.S. budget ought to be balanced. Whatever problems emerged, the feds would fix them!

In the 19th century, a man would go bust, and his friends and relatives would look upon it as a personal, moral failing. They would presume that he did something he oughtn’t have.

He gambled. He drank. He spent. He must have done something. But as economies collectivized, the risk of failure was removed from the individual and spread among the group.

If a man went broke in the 1930s, it wasn’t his fault; he could blame the Crash and Depression…

… if people were poor, it wasn’t their fault; it was society’s fault, for it had failed to provide jobs…

… if investors lost money, that, too, was no longer their fault, but the fault of the Fed… or the government…

… and if consumers spent too much money, whose fault was it?

The Fed had set rates too low… or something.

 

State Arithmetic

In every case, the masses recognized no personal failing. Instead, the failure was collective or technical… The mechanics had failed to turn the right screws. In politics, the masses recognized no higher authority than the will of the sacred majority. No matter what lame or abominable thing they decided to do, without an “ought,” how could it be wrong?

Likewise, economists won a Nobel Prize for pointing out that markets always know best. The Efficient Market Hypothesis demonstrated that the judgment of millions of investors and spenders is hard to improve upon. The method of modern economics shifted from exploring what a man ought to do… to statistical analysis.

“There is more than a germ of truth in the suggestion that, in a society where statisticians thrive, liberty and individuality are likely to be emasculated,” wrote M.J. Moroney in his Facts From Figures book.

“Historically,” Moroney explained, “statistics is no more than ‘State Arithmetic,’ a system by which differences between individuals are eliminated by the taking of an average.

“It has been used – indeed, still is used – to enable rulers to know just how far they may safely go in picking the pockets of their subjects.”

 

MoroneyM.J. Moroney’s “Facts from Figures” – as you can see from the book’s price, this was first published several credit bubbles ago. Moroney fully understood why the State is so eager to collect statistics on everything – they provide it with the “justification” to meddle in our lives.

 

Economists attached sensors to various parts of the great machine as if they were running diagnostics on an auto engine. Inflation, unemployment, GDP – depending upon the information they receive, they twist up interest rates… or open up the throttle to let in more new money. But had not the efficient market already set rates exactly where they needed to be?

As far as we know, no theory was ever offered to explain the contradiction. Markets are believed to be perfect. Yet, PhD economists believe they can override them and make them more perfect. They must believe they are smarter than all the millions of savers, lenders, and borrowers put together.

They oughtta know better.

 

Chart by: StockCharts

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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