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Steve Keen (Briefly) Explains Why Janet Yellen Won’t See The Next Big One Coming | Zero Hedge
Steve Keen (Briefly) Explains Why Janet Yellen Won’t See The Next Big One Coming | Zero Hedge.
“Conventional economic theory says ‘crisis don’t happen’ unless they are hit by an [outside] shock” exclaims Steve Keen, adding that numerous Nobel Prize winning economists have suggested that “capitalism is stable…” and “the problem of avoiding depressions has been solved for many decades.”
But as Keen explains in this brief but extremely succinct interview, they are wrong – and simply won’t (or can’t) see the next one coming. “People in the public think economists are experts on money; but, in fact, they are experts in finding ways not to include money, debt, and banks in their models”
And yet, despite their failed forecasts and dismal ‘scientific’ models, we trust they can enter (and exit) the greatest monetary experiment in history with no bad outcome…
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Less Inflation, Not More – Ludwig von Mises Institute Canada
Less Inflation, Not More – Ludwig von Mises Institute Canada.
Amongst other things, inflation is a form of taxation. As prices rise the purchasing power of savings falls. As a consequence, savers are harmed while creditors gain by having to repay their debts with less valuable money than when they originally borrowed.
With this in mind it is troubling that so many within the central banking establishment are currently arguing that what the world needs is higher inflation.
Janet Yellen, President Obama’s nominee to become the new Chair at the Federal Reserve, has long argued that higher inflation is invaluable when the economy is weak. After all, as her reasoning goes, rising prices bring greater profits to businesses. Rising wages help borrowers repay their debts. And let’s not forget that inflation encourages people and businesses to borrow money to spend more than might otherwise be the case.
Harvard economist and co-author of the influential book This Time It’s Different, Kenneth Rogoff, wrote recently that inflation “should be embraced.” He goes on to explain that “moderate” inflation of 4-6% is helpful when “massively over-valued” assets, such as housing, are in danger of deflating. (I have reviewed Rogoff’s arguments in this book in the first issue of Mises Canada’s Journal of Prices and Markets.)
Such views are no longer in the minority. Indeed, a great number of commentators echo the sentiment that higher inflation is needed now more than ever to “save” the economy. Nothing could be further from the truth.
In formulating his business cycle theory that earned him his Nobel Prize in economics, Friedrich Hayek called the effects of inflation “forced savings.” Inflation induces producers to take on investments through capital expenditures that would be inherently less stable than those brought about by voluntary savings. The unsustainable nature of these investments comes from two facts.
First is that as inflation increases nominal profits, businesses are fooled into thinking that their investments are more profitable than in real (inflation-adjusted) terms. Indeed, cost-based accounting compounds this problem as depreciation allowances, for example, are based on the historical purchase price of an asset and not the higher replacement cost brought about by inflation. Consequently businesses take on investments that are less profitable on the margin than would be the case lacking inflation.
On the other hand, Hayek focused on the time structure of production. It is insufficient for a business to merely produce the amount of goods demanded by consumers. It must also structure its production processes so that its investment yields a profit at that time when consumers stop saving and start demanding goods. This is important as any production process relies on savings to sustain it until it reaches a point of payoff. This point is identified, in the terms of modern finance, as the moment that the net present value of a project turns from negative (e.g., during the initial investment stage) to positive (e.g., when the fruits of this process generate sales).
Inflation skews the structure of production and induces businesses to take on more time consuming, or roundabout, production techniques. This is so because the net present value of any investment project is interest-rate sensitive. As rates fall, as is the case in the short term in real terms as inflation rises, longer durations until payoff will be profitable compared to a lower interest rate environment.
The forced saving that Hayek focused on was the increased investment brought on by inflationary central bank policies. More to the point, his emphasis was on the fact that the investment would be of the incorrect type. Because it does not coincide with real saving preferences, longer-dated and less profitable investments will be made than would otherwise be the case.
These forced investments are not sustainable because they are inconsistent with underlying preferences. Resulting only from the illusion of profitability that low interest rates bring about, these investments will be liquidated when interest rates rise (as would be the case in the long run as higher inflation pushes up borrowing costs) or as their generally unprofitable nature is exposed.
The concerted effort to increase inflation is the same medicine that caused the current economic malaise. The world is rife with poor investments that were undertaken in the past because of inflation-induced forced saving. As central banks pursued inflationary monetary policies businesses were induced into making investments inconsistent with the sustainable needs of the economy.
Calls for further inflation are akin to demands for higher taxes. As inflation redistributes wealth of savers to investors it favours a spendthrift attitude. This has much in common with the idea that increased taxes to allow governments to continue spending will somehow miraculously cure the economy’s woes.
Unfortunately and similar to all redistribution schemes, the result is tenuous. Just as bloated public sectors are now increasingly seen as the causes of the current crisis in such basket-case countries as Greece, for example, so too should inflationary policies be seen in a similar light. By artificially altering savings preferences, inflationary policies breed the unsustainable situations that we call recessions. To the extent that they cause these problems, economists should not be advocating them as means to exit recessions as well.
David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute’s Douglas E. French Prize. Send him mail.
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charles hugh smith- Why Economics Will Never Be a Legitimate Science
charles hugh smith- Why Economics Will Never Be a Legitimate Science.
| Why Economics Will Never Be a Legitimate Science (December 24, 2013)“If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we’re never going to get one.” Back in August I explored Why Isn’t There a Demonstrably Correct Economic Theory?. Many commentators have noted the obvious, that economics is a pseudo-science rather than a real science: beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy econometric model that spits out accurate predictions.One key element of science is that the results must be reproducible, that is, the same experiment/conditions should yield the same results time and again. I suspect that economic models are not applicable across all times and situations; a model might “work” in one era and in a very specific set of circumstances, but fail in another era or in a similar set of circumstances. Since human behavior is based in culture as well as in naturally selected (genetically driven) behavior, then cultural milieus and values obviously play critical roles in shaping economic behaviors. So presenting an economic model as “scientific” and quantifiable is in effect claiming that the bubbling stew of human culture can be reduced to quantifiable models that will yield predictions that are accurate in the real world. This is clearly false, as culture is not a static set of objects, it is a constantly shifting interplay of feedback loops. This helps explain why human behavior is so unpredictable. Virtually no one successfully predicted World War I in 1909, and no one predicted the collapse of the U.S.S.R. in 1985. Another reason all economic theories fail as scientifically verifiable models is that economics boils down to a very simple dynamic: those in power issue financial claims on resources as a “shortcut” way of gaining control of the resources without actually having to produce the resources or earn the wealth via labor and innovation. I think this is the one fundamental dynamic of economics, and it does not lend itself to reductionist models. Longtime correspondent Chuck D. recently explained why economics will never be predictive (i.e. a real science) like physics:
Thank you, Chuck, for an insightful, thought-provoking commentary. |
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100 Years Ago: Why Bankers Created the Fed :: The Circle Bastiat
100 Years Ago: Why Bankers Created the Fed :: The Circle Bastiat.
Christopher Westley writes in today’s Mises Daily, on the Fed’s 100th birthday:
The boom and bust cycle, explained by the Austrian School in such detail, became worse and worse in the period leading up to 1913. And with the rise of Progressive Era spending on war and welfare, and with the pressure on banks to inflate to finance this activity, the boom and bust cycles worsened even more. If there was one saving grace about this period it would be that banks were forced to internalize their losses. When banks faced runs on their currencies, private financiers would bail them out. But this arrangement didn’t last, so when the losses grew, those financiers would secretly organize to reintroduce central banking to America, thus engineering an urgent need for a new “lender of last resort.” The result was the Federal Reserve.
This was the implicit socialization of the banking industry in the United States. People called the Federal Reserve Act the Currency Bill, because it was to create a bureaucracy that would assume the currency-creating duties of member banks.
It was like the Patriot Act, in that both were centralizing bills that were written years in advance by people who were waiting for the appropriate political environment in which to introduce them. It was like our current health care bills, in which cartelized firms in private industry wrote chunks of the legislation behind closed doors long before they were introduced in Congress.
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Permanence and the State – Ludwig von Mises Institute Canada
Permanence and the State – Ludwig von Mises Institute Canada.
Engraved outside the National Archives Building in Washington D.C. is the phrase: “This building holds in trust the records of our national life and symbolizes our faith in the permanency of our national institutions.” It’s an uplifting quote meant to channel the spirit of patriotism. It’s also one that is supposed to burn an imprint into the reader’s mind: the state and its behemoth bureaucracies are here to stay.
Monuments of grandeur serve a special purpose. H.L. Mencken once wrote “the average man, whatever his errors otherwise, at least sees clearly that government is something lying outside of him and outside the generality of his fellow men.” This is very much true, and large, menacing buildings such as J. Edgar Hoover Building or the Lincoln Memorial help establish this cognitive divide. By using architectural techniques dating back to ancient Rome, the designers meant to create an aura of endearing superiority for the plebes to drool over.
In a recent National Review piece, Kevin D. Williamson wrote the initial builders of Washington’s various monuments “wanted to show that this new country of free men could hold its head high in the world and stand beside the pomp of any empire.” That may very have been a driving force, but I have a different theory: government monuments are meant to be imposing. But even more than that, they are formed for the purposes of transcending the here and now. If a sense of permanence can be established in the citizenry, there is little standing in the way of perpetual domination. The use of the word “permanency” on the National Archives building is no coincidence. There is no better way to dispel resistance than to perpetuate the idea that it’s futile.
The state, as Rothbard noted, appears to many as “the supreme” and “the eternal.” But that perception is a farce. Very little makes an indelible mark on human history. People are born and die. Businesses start and end. Wealth comes and goes. And states are established and dismantled. None, except for the brightest and most convincing of thinkers, sticks around for very long.
Pulling off immortality would be a great feat for man. But alas, we are born with a set time in the material world. The state’s quest for permanency is nothing but extreme hubris displayed by the most imperialistic of empires. Governments rise and fall all the time. Currently, the regimes in both Syria and the Ukraine risk falling due to civil unrest. In Europe, governments are continually teetering on the brink. Just two decades ago, the Soviet Union collapsed, giving way for a new cronyist form of governance. It was no different from the crumbling of the empires of Rome, Ottoman, and Byzantine.
What truly achieves permanence is not lofty monuments built to worship some all-powerful dictator, but ideas. Mankind’s future is decided on mental battlefields. The very reason we have oppressive governments today is because enough have been fooled to believe that society couldn’t function without them. It’s why public schooling is mandatory in much of the Western world. Get ‘em young, pump ‘em full of tall tales of national glory, and watch ‘em recite the pledge of allegiance until they have one foot in the grave. That’s the tried-and-true formulate for institutionalizing subservience. It’s the Orwellian logic of, “he who controls the past controls the future. He who controls the present controls the past.”
By teaching that monopoly government is eternal, it becomes eternal. The lesson boxes in the thought process of impressionable fellows. It disallows them the ability to conceive of anything different from the status quo. And worse, it ingrains the idea of eternal residing in the heart of national government.
A sloppy understanding of what is really universal follows. No longer are principles seen as defining features for societal relations. Government becomes the focal point of all disputes. Order comes only from the starched-shirt bureaucrat – not from any logical precepts. Discovering the rational boundaries by which humans should live, organize, and govern their actions is the basis of natural law. It is meant to be timeless, applying universally to all humanity. The very notion of an all-encompassing order is a threat to state, which relies on unquestioned obedience. More so, it is threat to the Marxist/progressive theory of ever-evolving laws that replace and duplicate each other on a journey to the end of history.
Even some libertarians doubt the efficacy and truthfulness of permanence in teleological law. In a recent FEE.org debate, minarchist philosopher Tibor Machan wrote, “because none of us is going to live for eternity, none of us can establish anything as timelessly true.” This is the same mindset that decides slavery was once justified, state-enforced segregation was perfectly fine, and unions were a virtuous force in combating excess capitalism. In simpler words, it’s a superfluous understanding of history in relation to logic-based law. What it amounts to is a rationalization of crimes just because they happened in the past. Everything is nothing, and nothing is everything all at once.
Understanding the nature of permanence in relation to government provides insight into how fickle the state truly is. Societies have progressed from despotism to democracy to monarchy to republics. Opinions have changed, elections have occurred, and ruling bodies have been tossed out overnight. No matter how espoused, the sacredness of government eventually unravels. The people are then left staring at the truth: that their leaders are nothing but pompous tyrants.
This tenuous reality was present in the recent public execution of Jang Song-thaek in North Korea. Song-thaek, uncle to supreme dictator Kim Jong-un, was given the death treatment for angering his nephew. The Kim dynasty is supposed to be sacred. Their word is supposed to be God’s. Yet, here a second-hand man by marriage was offed like an injured race horse. In the most tyrannical country on earth, the aura of permanence saw a hole poked through it. In effect, the emperor was revealed to have no clothes, except for some rags of irrational tendencies.
The heads of the state would love nothing more than to wield the force of immortality. It’s a power-trip that pays off financially and mentally. Constructing the potemkin village of surreal authority makes for quick shock and awe. It aides in scaring the citizenry into compliance. But facades don’t last forever, no matter the marble symposiums erected as tribute.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
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Mainstream Economists Finally Admit that Runaway Inequality Is Hurting the Economy Washington’s Blog
Mainstream Economists Finally Admit that Runaway Inequality Is Hurting the Economy Washington’s Blog.
But Bad Government Policies Are Making Inequality Worse By the Day
AP reported Tuesday:
The growing gap between the richest Americans and everyone else isn’t bad just for individuals.
It’s hurting the U.S. economy.
***
“What you want is a broader spending base,” says Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”
***
“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.
***
Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a shift from a few years ago, when many analysts were divided over whether pay inequality was worsening.
Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”
As one example, Paul Krugman used to doubt that inequality harmed the economy. As the Washington Post’s Ezra Klein wrote in 2010:
Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.
Krugman writes this week in the New York Times:
The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.
They’re wrong.
The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?
Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.
Start with the numbers. On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.
And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.
Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.
***
Inequality is linked to both the economic crisis and the weakness of the recovery that followed.
Indeed – as we noted in September – a who’s-who of prominent economists in government and academia have now said that runaway inequality harms economic growth, including:
- Fed chairman Ben Bernanke (video continues here)
- Federal Reserve Governor Sarah Bloom Raskin (more)
- Former FDIC Chair Sheila Bair
- Nobel prize winning economist Joseph Stiglitz
- One of America’s leading economists, Robert Shiller
- Former chief IMF economist Raghuram Rajan
- Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
- Stanford University professor John Taylor
- Northeastern University professor Robert Gordon (more)
- University of Oregon professor Mark Thoma
- University of California professor Emmanuel Saez
- Paris School of Economics professor Thomas Piketty
- Famed economist John Kenneth Galbraith
- Harvard Business School professor David Moss
- Paris School of Economics professor Romain Rancière
- London School of Economics professor Robert Wade
- University of Notre Dame professor David Ruccio
- Harvard professor Lawrence Katz
- Arkansas State University professor Christopher Brown
- Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
- Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
- World Bank economist Branko Milanovic
- Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof
- Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department, Bruce Bartlett
- IMF economist Andrew Berg (IMF economist)
- IMF economist Jonathan Ostry
- Federal Reserve chairman from 1934 to 1948, Marriner S. Eccles
- And many others
Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.
Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:
- More than half of all international investors polled by Bloomberg
- Billionaire and legendary investment adviser Jeremy Grantham
- Billionaire and hedge fund manager Stanley Druckenmiller
- Billionaire Bill Gates
- Billionaire Warren Buffet
- Billionaire Nick Hanauer
Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire . And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republicsin Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)
Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.
And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealthfrom the lower, middle and more modest members of the upper classes to the super-elite.
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When economic theory fails the maths exam | Business Spectator
When economic theory fails the maths exam | Business Spectator.
Eight years ago, in December 2005, I began warning of an impending economic crisis that would commence when the rate of growth of private debt started to fall. My warnings hit a popular chord: journalists throughout the world picked it up and publicised my views – as well as similar arguments from Nouriel Roubini, Dean Baker, Ann Pettifor, Michael Hudson, Wynne Godley, and a few others.
But our arguments were ignored by the economics profession because, according to mainstream economic theory, private debt should have no impact on aggregate demand. As Bernanke put it, lending simply transfers spending power from lender to borrower, and “pure redistributions should have no significant macro-economic effects” (Bernanke, Essays on the Great Depression, p. 24).
Yet the empirical evidence that change in debt does have “significant macro-economic effects” is compelling: the correlations of change in debt to the level of employment (Figure 1), and of acceleration in debt to changes in employment (Figure 2), are overwhelming.
Figure 1: Compelling visual evidence? Not to a mainstream economis
Figure 2:Something else to ignore because it doesn’t pass the a priori test
This visually compelling numerical evidence of what caused the crisis was and still is ignored by mainstream economists, while less numerate journalists latched onto it. Why? You would expect that the more numerate a person is, the more he would take evidence like this seriously.
But that isn’t the case it seems – and a fascinating new study of numeracy and reasoning has indicated why this might be so. It seems that when an issue is politically neutral, a higher level of numeracy does correlate with a higher capacity to interpret numerical data correctly. But when an issue is politically charged – or the numerical data challenges a numerate person’s sense of self – numeracy actually works against understanding the issue. The reason appears to be that numerate people employed their numeracy skills to evade the evidence, rather than to consider it.
The research paper, Motivated Numeracy and Enlightened Self-Government, tested people’s ability to interpret numerically challenging data against their ratings on a numeracy test, and their political allegiances. Precisely the same data was presented as the results of two quite different studies: whether a new skin care product did or did not reduce skin rashes, and whether gun control laws did or did not reduce crime. The hypothetical data was set up so that half of the survey group saw objectively positive results – the skin care product worked, or gun control reduced homicide rates – and the other saw objectively negative results in each case (see Figure 3).
Figure 3: The hypothetical data presented as real data to different segments of the survey group
The “data” was designed to be confusing to those with low numeracy skills: a simple comparison of numbers in the first column would lead to reaching the wrong conclusion – that the skin cream increased rashes when it reduced them, or that gun control laws decreased crime when it increased it. Getting the correct answer involved a comparison of the ratios of the two columns.
The experimenters expected that more numerate people would trump less numerate people in both instances – so that effectively, a higher level of numeracy would lead to a lower level of ideological bias, whether the issue was politically charged or not, and whether the subject was conservative (Republican) or progressive (Democrat). The argument, effectively, was that a higher level of intellectual skill would mean higher cognition in general and a lower level of political bias. As a psychological hypothesis, they termed this the “Science Comprehension Thesis” (SCT).
Mentally, the reason for the expected bias of the less numerate people was that they would use what Kahneman called System 1 or “fast” thinking, which is more instinctive and emotional – the sort of reasoning that stops you becoming a meal for a lion on the Serengeti. More numerate people were expected to also employ System 2 or “slow”, logical reasoning – the sort that enables you to turn the lions into prey rather than predators.
But there was an alternative hypothesis as well, which proposed that more numerate people would use their greater numerical skills to hang on to pre-existing beliefs, in order to preserve their membership of a group that was socially important to them. The researchers termed this hypothesis the “Identity-protective Cognition Thesis” (ICT):
Individuals, on this account, have a large stake – psychically as well as materially – in maintaining the status of, and their personal standing in, affinity groups whose members are bound by their commitment to shared moral understandings. If opposing positions on a policy-relevant fact – e.g., whether human activity is generating dangerous global warming – came to be seen as symbols of membership in and loyalty to competing groups of this kind, individuals can be expected to display a strong tendency to conform their understanding of whatever evidence they encounter to the position that prevails in theirs.
The results are summarised in Figure 4 – and interpreting it might itself be challenging if you’re not American, because red signifies conservative while blue signifies progressive!
The simplest observation is that higher numeracy led to a higher ability to interpret the data in the politically-neutral skin rash data, and that there was no significant difference in ability due to political allegiance.
Figure 4: Correct results by topic versus numeracy level and political allegiance
The more complex result is that higher levels of numeracy led to higher, rather than lower, polarisation on the politically charged issue of gun control. There was no gap between Republicans and Democrats of low numerical skill when interpreting data that found that gun control increased crime: both groups were equally bad at getting the right answer. But there was a very big gap for numerate Republicans and Democrats when the “results” contradicted their pre-existing beliefs. Highly numerate Democrats were little better than innumerate Democrats in correctly interpreting data that showed that gun control increased crime; and equally, highly numerate Republicans were little better than innumerate ones in interpreting data that showed that gun control reduced crime.
The polarisation between Republicans and Democrats also increased as numeracy rose – the opposite of what you would expect if you thought political differences over objective data arose from an inability to interpret that data. There was no difference between innumerate Republicans and Democrats when presented with data that implied that gun control failed, but a very large gap between their numerate brethren. The substantial gap between innumerate Republicans and Democrats when presented with data that implied that gun control worked (we’re talking America, after all) became a chasm between the numerates.
The authors found the implications of their study for democracy rather depressing, since it implies that both evidence and intelligence make precious little difference to how people will vote on contentious issues – which are after all the only ones we do vote on. The need to preserve a sense of identity matters more than the evidence – and this can’t be treated as “irrational” behavior either, because it’s quite rational to want to retain membership of a group that is immediately important to you.
Numeracy can make you blind. Who’d a thought?
Someone who did belatedly reach the same conclusion was one of history’s great numerates,Max Planck – the father of quantum mechanics. He found it near impossible to convince his fellow physicists to accept his new – and empirically far more accurate – characterisation of the nature of energy, and he ultimately concluded that:
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. (Max Planck).
Planck’s pessimism might well turn out to be optimism when compared to how economics “evolves”. As John Quiggin put it in his book Zombie Economics (which hands down has the best cover of an economics book that I’ve ever seen), ideas that manifestly conflict with empirical data continue to exist long after reality killed them. The data on private debt and employment should long ago have killed the “Loanable Funds” model of lending that led Bernanke and his tribe to ignore private debt before the crisis hit, but I expect they’ll hang on to their pet theory and find a way to make it appear compatible with the data instead—and Larry Summers may well have given them the means to remain part of The Great Undead with his “secular stagnation” hypothesis.
Kahan and colleagues’ research also has implications for people in the global warming debate – and many other areas of social conflict over empirical issues. Each side tends to deride the other as lacking the ability to interpret the data – thus thinking they are more numerate than their opponents. Those who believe that global warming is happening (guilty as charged Your Honour) tend to think that their opponents are scientifically dumber than they are, and simply can’t process the overwhelming numerical evidence in favour of the hypothesis; those who reject global warming believe their opponents are politically motivated dumbos who are deliberately hoodwinking themselves.
But this research implies that leading lights on both sides of the argument could be just as numerate as each other, and numerical evidence alone will never cause one side to concede defeat. Only reality itself will ultimately end that debate.
Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.
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Does the Fed Favor Any Group in Particular? Mark Spitznagel vs. Paul Krugman
Does the Fed Favor Any Group in Particular? Mark Spitznagel vs. Paul Krugman.
Kicking off this Economic Farce Royale… we have Mark Spitznagel explaining why the Fed is the root of all evil… or at least the source of the so-call “wealth gap”. We’ve sprinkled our own comments throughout to keep it lively and (God help us) not too serious.
OK. Round one, *ding, ding*…
Amajor issue is the growing disparity between rich and poor, the 1% versus the 99%. While the president’s solutions differ from Republicans, they both ignore a principal source of this growing disparity.
The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm… dun, dun, dun… the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.
[Go figure…]
David Hume, the 18th-century Scottish philosopher, pointed out that when money is inserted into the economy (from a government printing press or, as in Hume’s time, the importation of gold and silver), it is not distributed evenly but “confined to the coffers of a few persons, who immediately seek to employ it to advantage.”
[Well, yeah…]
In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students showed that an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (I’m looking at you Ben Bernanke) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.
As Mises protégé Murray Rothbard explained, monetary inflation is akin to counterfeiting, which necessitates that some benefit and others don’t. After all, if everyone counterfeited in proportion to their wealth, there would be no real economic benefit to anyone. Similarly, the expansion of credit is uneven in the economy, which results in wealth redistribution. To borrow a visual from another Mises student, Friedrich von Hayek, the Fed’s money creation does not flow evenly like water into a tank, but rather oozes like honey into a saucer, dolloping one area first and only then very slowly dribbling to the rest.
The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.
The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.
At some point, of course, the honey flow stops—but not before much malinvestment. Such malinvestment is precisely what we saw in the historic 1990s equity and subsequent real-estate bubbles (and what we’re likely seeing again today in overheated credit and equity markets), culminating in painful liquidation.
The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president’s presumption of tax unfairness (if there is anything unfair about approximately half of a population paying zero income taxes) or deregulation.
Pitting economic classes against each other is a divisive tactic that benefits no one. Yet if there is any upside, it is perhaps a closer examination of the true causes of the problem. Before we start down the path of arguing about the merits of redistributing wealth to benefit the many, why not first stop redistributing it to the most privileged?
Ooh… Them fightin’ words. OK, we turn to *ahem* America’s leading economist, nobel laureate and pointy head, Paul Krugman. He’ll now take himself too seriously and give us his academic rebuttal. We took a few editorial liberties so you wouldn’t fall asleep…
Round two, *ding, ding*…
I’ll be the first to admit that these past few years have been lean times in many respects — but they’ve been boom years for agonizingly dumb, pound-your-head-on-the-table economic fallacies. The latest fad — illustrated by what Mark Spitznagel just wrote above [ouch] — is that expansionary monetary policy is a giveaway to banks and plutocrats generally.
Indeed, his screed actually claims that the whole 1 versus 99 thing should really be about reining in or maybe abolishing the Fed. (Hah… Could you imagine that!) Unfortunately, and I’m sorry for this backhanded compliment, some pretty smart people have bought into at least some version of this dumb story.
What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways!
First, the situation is utterly the reverse of what Spitznagel claimed. Quantitative easing isn’t being imposed on an unwitting populace by financiers and rentiers; it’s being undertaken, to the extent that it is, over howls of protest from the financial industry. I mean, c’mon! Where are the editorials demanding that the Fed raise its inflation target, right?!
[Crickets…]
Uhh… Beyond that, let’s talk about the economics.
The deliberately misleading… er I mean, naive, version of Fed policy Spitznagel made is that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff from the banks, usually short-term government debt but nowadays sometimes other stuff with money that didn’t exist before. But, seriously, it’s not a gift.
To claim that it’s a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.
I mean, what is the un-artificial, or if you prefer, “natural” rate of interest? As it turns out, there is actually a standard definition of the natural rate of interest and it’s basically defined on a PPE basis (that’s for proof of the pudding is in the eating). Roughly, the natural rate of interest is something, kind of like the rate that would lead to stable inflation at more or less full employment.
[Uh-huh…]
And we have low inflation with high unemployment, strongly suggesting that the natural rate of interest is below current levels, and that the key problem is the zero lower bound which keeps us from getting there. Under these circumstances, expansionary Fed policy isn’t some kind of giveway to the banks, it’s just a giveaway to the banks that the economy needs.
Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Yes, I just wrote that with a straight face. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened.
How, exactly, does expansionary monetary policy hurt the 99 percent? Think of all the people living on fixed incomes, we’re told. But who are these people? I know the picture: retirees living on the interest on their bank account and their fixed pension check — and there are no doubt some people fitting that description. But there aren’t many of them, which makes it ok.
No, the real victims of expansionary monetary policies are the very people who the current mythology says are pushing these policies. And that, I guess, explains why we’re hearing the opposite.
The typical retired American these days relies largely on Social Security — which is indexed against inflation. He or she may get some interest income from bank deposits, but not much: ordinary Americans have fewer financial assets than the elite can easily imagine. And as for pensions: yes, some people have defined-benefit pension plans that aren’t indexed for inflation. But that’s a dwindling minority — which again means it’s perfectly ok — and I assume the effect of, say, 1 or 2 percent higher inflation isn’t going to be enormous even for this minority.
What’s the takeaway? That unless you’re going to go stumping for policy on capitol hill (in which case, there’s no hope for you) you should focus on actionable steps you can take to increase your wealth… instead of engaging in groupthink. As for the policy debate…well, it’s always good for a laugh.
Regards,
The Daily Reckoning
Ed. Note: Whether you’re on a fixed income or not, there are ways you can safeguard and even grow your wealth, regardless of where you stand on the issue debated above. Today’s Daily Reckoning email edition gave readers a chance to get in on a one-time live event that will help them do just that. Didn’t see that offer? Not to worry… The Daily Reckoning will be back tomorrow with another opportunity for you to take advantage of. Be sure you don’t miss that one too. Sign up for the FREE Daily Reckoning email edition, right here.
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The Problem with Empiricism – Ludwig von Mises Institute Canada
The Problem with Empiricism – Ludwig von Mises Institute Canada.
Mark Twain’s coined phrase “there are lies, damn lies, and statistics” has the privilege of being used far too often and not nearly enough. The saying is invoked by people who see a genius in the mirror but are much too dense for their own good. They are the ones who feign skepticism while eagerly accepting whatever empirical evidence bolsters their own dogma.
These perpetrators of the crime against intellect are by and large statists, namely economists. They spend their days waiting to pounce on detractors on the first blip of data that justifies their collectivism. Unemployment inched up? Need more government stimulus! Unemployment falls slightly? Thank Heavens Washington is spending so much money to put people to work!
The key here is that any piece of data can be taken and spun into a web narrative to fit an agenda. Government-gathered statistics often provide a potpourri of easily-moldable fictions. And because the facts and figures come straight from the state’s mouth, they are often taken as Gospel. Anyone who thinks otherwise – that bureaucrats might have their own motives for possibly fudging information – is smeared as a tinfoil-chewing crank in need of immediate institutionalization.
The exception is when news breaks that some rogue public servant doctored stats for pure political purposes.
The New York Post, a paper not exactly known for its pride in accurate reporting, recentlyclaimed the Census Bureau was aware manipulation of the employment report was going on in the run-up to the 2012 election. Just a few months out from when America put Sugar Daddy Obama back in the Oval Office, the national unemployment rate happened to fall from 8.1% to 7.8%. It wasn’t all that significant of a drop, but the talking heads sure made it sound like the Second Coming. The Post – which is relying on an unknown but “reliable source” – claims the figure was intentionally faked.
It goes without saying that unfounded claims based on a mysterious origin aren’t the most credible of sources. Even the everyday man on the street is wary about unnamed sources of information. He wants some kind of supporting evidence that isn’t just hearsay.
The Post report may be all smoke and no gun, but it’s not far from the realm of possibilities. Public sector workers have every incentive to keep their layabout jobs. In 2010, Census Department employee Julius Buckmon was fired for fudging results. He claims to have been given orders from higher-ups.
It also doesn’t help that the method the government uses to measure unemployment is already lackluster enough. Workers at the Bureau of Labor Statistics simply call up households and inquire about the inhabitants’ working situation. They don’t hook respondents up to a polygraph machine. The whole thing is based on the trustworthiness of the average schmuck. And even when the data is gathered the least severe measure of total employment, known as U3, is used as the headline number in media reports. The measuredoes not account for discouraged workers, who are tossed into the U6 bracket along with part-time workers seeking full-time employment. So the biochemist washing dishes at his local diner while scouring the classifieds each morning for a new position is left out. Since the beginning of America’s economic doldrums five years ago, the U6 unemployment rate has failed to drop below double-digits. But by highlighting only the “headline” number, the President and his press apparatchiks shine a light onto an otherwise dark employment picture.
Government manipulation of data is nothing new historically. Stalin famously had Western economists fooled for decades with erroneous reports on economic growth in his communist paradise. In 1989, Paul Samuelson, arguably the most influential academic economist of the late twentieth century, wrote in his famed textbook the “Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” Two years later, the Union of Soviet Socialist Republics disintegrated. No mea culpa was ever issued.
Despite the philosophical shortcomings of pure empiricism, the great breadth of society has a fetish for data. The reason is simple. Numbers and statistics don’t just save us from having to make coherent arguments, they make it easy to not have to think very hard.
That’s the problem with radical scientism and empirics in general: the notion that logic is not needed to interpret information to fully understand the surrounding world. Stats and figures are malleable. They can be used to make the case for laissez faire, statism, interventionism, or whatever “ism” strikes your fancy.
Data is useless without a sound theory to interpret it. Otherwise, it may as well be a sheet of randomized numbers. Yet the empirical positivists are quick to dismiss the idea that things can be proved without observable evidence. As the late Murray Rothbard asked in his essay “In Defense of Extreme Apriorism”:
“what is the vaunted ‘evidence’ of the empiricists but the bringing of a hitherto obscure proposition into evident view?”
An evidence-only approach to the dismal science is destined to die on the mantle of popular methodology. Whatever the data may show, it can be easily explained away in empty pontificating and counterfactual hypothesizing. The adherents to scientism are left babbling in their own incoherent rationale. Basically, no amount of factual confirmation will convince the true believers of positive empiricism. They talk a good game of sensory verification, but have an excuse for their own canon under each sleeve.
It’s not paranoid gibberish to assume government bureaucrats would juice the numbers to make sure their preferred knight in shining armor stays in the White House. As much as Nancy Pelosi, Paul Krugman, and the New York Times editorial board would like to pretend, public servants are not boy scouts donned with merit badges as far as the eye can see. They are just as selfish and conniving as Wall Street traders.
Here is the most important lesson not taught in government 101: politicians and their over-paid henchmen lie. They’ll sell you lemon, break the warranty, set the bank loose on you, and then demand your undying loyalty. Everything they say should be taken with a grain of FDA-approved salt, including monthly data reports.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
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Noam Chomsky Criticises Canada’s Energy Ambitions
Noam Chomsky Criticises Canada’s Energy Ambitions. (source)
Noam Chomsky, the famed linguist, philosopher, and political commentator has recently taken part in aninterview with the Guardian, to discuss Canadian Prime Minister Steven Harper’s exploitation of the Alberta tar sands in an effort to pursue economic development no matter the cost.
“It means taking every drop of hydrocarbon out of the ground, whether it’s shale gas in New Brunswick or tar sands in Alberta and trying to destroy the environment as fast as possible, with barely a question raised about what the world will look like as a result,” he said.
Referencing the indigenous Canadian’s opposition to the expansion plans at the Alberta tar sands, one of the most polluting and fastest growing sources of oil in the world, Chomsky said that “it is pretty ironic that the so-called ‘least advanced’ people are the ones taking the lead in trying to protect all of us, while the richest and most powerful among us are the ones who are trying to drive the society to destruction.”
Related article: U.S., Canada Lead World in Shale Gas Production
Recently, in response to an indigenous movement called ‘Idle No More’, which was set up to oppose Harper’s aggressive promotion and expansion of polluting tar sands projects and his disregard for the environment, armed Canadian police forces raided a camp of shale gas protestors in New Brunswick. A sign that the conflict between the government and environmentalists is becoming more heavy-handed.
Chomsky explained that the calls to save the environment are currently ineffective, and that they must be worded in a way that emphasises how fighting climate change is can improve people’s lives.
“If it’s a prophecy of doom, it will act as a dampener, and people’s reaction will be ok, I’ll enjoy myself for a couple of years while there’s still a chance. But as a call to action, it can be energising. Like, do you want your children, and grandchildren, to have a decent life?”
Related article: Canada and China Deepen Cooperation but Potential Roadblocks Loom
He suggests that mass transportation, localised agriculture, and higher energy efficiency are easy ways to reduce energy consumption and therefore reduce emissions, giving an example that it is much better for an individual, and the environment, to spend 10 minutes on the underground travelling across a city, than an hour stuck in traffic on the surface.
One of the greatest foes of climate change, according to Chomsky, are the markets. “Markets are lethal, if only because of ignoring externalities, the impacts of their transactions on the environment. When you turn to energy production, in market exchanges each participant is asking what can I gain from it? You don’t ask what are the costs to others. In this case the cost to others is the destruction of the environment. So the externalities are not trivial.”
After the 2008 financial crisis banks were able to ignore free market systems and ask the government to bail them out, unfortunately “in the case of the environment there’s no one to bail it out,” and it is fast approaching a major crisis point.
By. James Burgess of Oilprice.com
Related articles
- Chomsky slams tar sands and fracking plans (theguardian.com)
- Noam Chomsky: Canada on Fast-Speed Race ‘to Destroy the Environment’ (commondreams.org)
Olduvaiblog: Musings on the coming collapse 
