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.
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.
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.
Since 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…”
“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.
It 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.
Dilbert’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.
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.”
M.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.
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
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...