Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Steve Keen'

Tag Archives: Steve Keen

Godzilla is good for you? | Business Spectator

Godzilla is good for you? | Business Spectator.


3 Mar, 7:15 AM 

Fans of Japanese schlock fiction will be pleased to know that that old mega-favourite Godzillais returning in 2014, to stomp on simulated cities in a cinema near you. And of course, he’s bigger and better: the original Japanese movie had him at about 50-100 metres and weighing 20-60,000 tons; I’d guess he was about twice that size in the 1998 US remake; and by the looks of the trailer for the 2014 movie, he’s now a couple of kilometres tall and probably weighs in the millions.

That’s good: when you want thrills and spills in a virtual world, then as it is with sport (according to Australian comedic legends Roy and HG) too much lizard is barely enough. The bigger he gets, the more he can destroy, which makes for great visual effects (if not great cinema).

But in the real world? The biggest dinosaur known came in at about 40 metres long, weighed “only” about 80 tonnes, and had an estimated maximum speed of eight kilometres an hour. In the real world, size imposes restriction on movement, and big can be just too big. So a real-world Godzilla is an impossibility.

Cinema — especially CGI-enhanced cinema — can overcome the limits of evolution, and therein lie the thrills and spills of Godzilla: the bigger he is, the more terrifying. Godzilla is scary purely because of his scale: a 100 metre Godzilla is scary; the 1 metre iguana species from which he supposedly evolves is merely cute. In Godzilla, there is a positive relationship between size and destructive capacity.

Maybe Bank of England governor Mark Carney should attend the UK premiere, because he clearly needs to learn this lesson and apply it to his own bailiwick. If he can’t learn it from economics, then maybe he can learn it from the movies by analogy: finance is dangerous in part because, like Godzilla, it is too big.

Instead, as Howard Davies — himself an ex-deputy governor of the Bank of England — observed in a recent Project Syndicate column, Carney seems almost to celebrate the prospect that the UK’s financial sector — now with assets four times the size of its economy — might grow to nine times the size of GDP if current trends continue.

“Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050… the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous,” Davies said.

In a speech marking the 125th anniversary of The Financial Times, Carney noted that when the paper was founded, “the assets of UK banks amounted to around 40 per cent of GDP. By the end of last year, that ratio had risen tenfold.” He then noted that if the UK maintains its share of global finance, and “financial deepening in foreign economies increases in line with historical norms”, then “by 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.”

From 40 per cent to 400 per cent of GDP in 125 years, and then from 400 per cent to 900 per cent in another 35: even the Godzilla franchise would be impressed with that rate of growth. And Carney seems to relish the prospect. Though he notes that “some would react to this prospect with horror. They would prefer that the UK financial services industry be slimmed down if not shut down”, he next stated that “in the aftermath of the crisis, such sentiments have gone largely unchallenged”. And he proceeds to challenge them.

After stating that “if organised properly, a vibrant financial sector brings substantial benefits”, he denied any responsibility in determining how big the financial sector should be — either absolutely or relative to the economy:

“It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe,” Carney said.

Oddly, as well as seeing no necessary relationship between size and safety, he also takes a lopsided position on this non-responsibility: while he is not responsible for determining the finance sector’s size, he nonetheless thinks that his role is to make it as big as it can be:

“The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability…”  Carney said.

Herein lies the rub, and the non-sequitur: bigger cannot mean more stable, for the simple reason that the assets of the financial sector are, in large measure, the debts of the real economy to the banks. The bigger the assets of the financial sector, the higher the debts of the real economy have to be. Ultimately, even with near-zero interest rates, servicing this debt is likely to prove impossible to large segments of the economy, leading to a financial crisis.

That logic is what led me to expect a financial crisis back in 2005: when I saw the data for Australia’s and America’s private debt to GDP ratios (figure 1), I was convinced that a crisis was in the offing. That rate of growth of debt compared to GDP could not continue. Figure 1 shows that I was right: the rate of growth of debt turned negative, ushering in the economic crisis that no central bank foresaw (except the Bank of International Settlements, thanks to its Minsky-aware research director Bill White). Debt to GDP levels fell as, for a while, the private sector deleveraged.

Growth is now returning — strongly in the US, meekly in the UK — largely because private debt is rising once more. But rather than seeing danger here, the UK’s central banker happily contemplates a world in which the UK financial sector is more than twice as big as it is now — which would require the liabilities of the non-bank side of the economy to grow to roughly four times GDP.

Figure 1: The UK’s Godzilla is bigger and faster growing than the US Godzilla

 

Graph for Godzilla is good for you?

 

There is a line of thought that blames central banks for causing the crisis — with Scott Sumner being the first to outright blame the 2007 crisis on Ben Bernanke. I don’t blame them for causing the crisis, but rather for letting the force build up that would make one inevitable — by letting bank debt get much, much larger than GDP without batting an eyelid.

Now we’ve had the crisis, and if Carney’s speech is any guide, they’re once again letting private debt levels rip again, because even after the experience of 2008, they can’t see a problem. Given this complete failure of oversight, I expect that the sequel to the economic crisis of 2007 will appear before the next sequel for Godzilla.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of theMinsky software program.

 

Godzilla is good for you? | Business Spectator

Godzilla is good for you? | Business Spectator.


3 Mar, 7:15 AM 

Fans of Japanese schlock fiction will be pleased to know that that old mega-favourite Godzillais returning in 2014, to stomp on simulated cities in a cinema near you. And of course, he’s bigger and better: the original Japanese movie had him at about 50-100 metres and weighing 20-60,000 tons; I’d guess he was about twice that size in the 1998 US remake; and by the looks of the trailer for the 2014 movie, he’s now a couple of kilometres tall and probably weighs in the millions.

That’s good: when you want thrills and spills in a virtual world, then as it is with sport (according to Australian comedic legends Roy and HG) too much lizard is barely enough. The bigger he gets, the more he can destroy, which makes for great visual effects (if not great cinema).

But in the real world? The biggest dinosaur known came in at about 40 metres long, weighed “only” about 80 tonnes, and had an estimated maximum speed of eight kilometres an hour. In the real world, size imposes restriction on movement, and big can be just too big. So a real-world Godzilla is an impossibility.

Cinema — especially CGI-enhanced cinema — can overcome the limits of evolution, and therein lie the thrills and spills of Godzilla: the bigger he is, the more terrifying. Godzilla is scary purely because of his scale: a 100 metre Godzilla is scary; the 1 metre iguana species from which he supposedly evolves is merely cute. In Godzilla, there is a positive relationship between size and destructive capacity.

Maybe Bank of England governor Mark Carney should attend the UK premiere, because he clearly needs to learn this lesson and apply it to his own bailiwick. If he can’t learn it from economics, then maybe he can learn it from the movies by analogy: finance is dangerous in part because, like Godzilla, it is too big.

Instead, as Howard Davies — himself an ex-deputy governor of the Bank of England — observed in a recent Project Syndicate column, Carney seems almost to celebrate the prospect that the UK’s financial sector — now with assets four times the size of its economy — might grow to nine times the size of GDP if current trends continue.

“Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050… the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous,” Davies said.

In a speech marking the 125th anniversary of The Financial Times, Carney noted that when the paper was founded, “the assets of UK banks amounted to around 40 per cent of GDP. By the end of last year, that ratio had risen tenfold.” He then noted that if the UK maintains its share of global finance, and “financial deepening in foreign economies increases in line with historical norms”, then “by 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London.”

From 40 per cent to 400 per cent of GDP in 125 years, and then from 400 per cent to 900 per cent in another 35: even the Godzilla franchise would be impressed with that rate of growth. And Carney seems to relish the prospect. Though he notes that “some would react to this prospect with horror. They would prefer that the UK financial services industry be slimmed down if not shut down”, he next stated that “in the aftermath of the crisis, such sentiments have gone largely unchallenged”. And he proceeds to challenge them.

After stating that “if organised properly, a vibrant financial sector brings substantial benefits”, he denied any responsibility in determining how big the financial sector should be — either absolutely or relative to the economy:

“It is not for the Bank of England to decide how big the financial sector should be. Our job is to ensure that it is safe,” Carney said.

Oddly, as well as seeing no necessary relationship between size and safety, he also takes a lopsided position on this non-responsibility: while he is not responsible for determining the finance sector’s size, he nonetheless thinks that his role is to make it as big as it can be:

“The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability…”  Carney said.

Herein lies the rub, and the non-sequitur: bigger cannot mean more stable, for the simple reason that the assets of the financial sector are, in large measure, the debts of the real economy to the banks. The bigger the assets of the financial sector, the higher the debts of the real economy have to be. Ultimately, even with near-zero interest rates, servicing this debt is likely to prove impossible to large segments of the economy, leading to a financial crisis.

That logic is what led me to expect a financial crisis back in 2005: when I saw the data for Australia’s and America’s private debt to GDP ratios (figure 1), I was convinced that a crisis was in the offing. That rate of growth of debt compared to GDP could not continue. Figure 1 shows that I was right: the rate of growth of debt turned negative, ushering in the economic crisis that no central bank foresaw (except the Bank of International Settlements, thanks to its Minsky-aware research director Bill White). Debt to GDP levels fell as, for a while, the private sector deleveraged.

Growth is now returning — strongly in the US, meekly in the UK — largely because private debt is rising once more. But rather than seeing danger here, the UK’s central banker happily contemplates a world in which the UK financial sector is more than twice as big as it is now — which would require the liabilities of the non-bank side of the economy to grow to roughly four times GDP.

Figure 1: The UK’s Godzilla is bigger and faster growing than the US Godzilla

 

Graph for Godzilla is good for you?

 

There is a line of thought that blames central banks for causing the crisis — with Scott Sumner being the first to outright blame the 2007 crisis on Ben Bernanke. I don’t blame them for causing the crisis, but rather for letting the force build up that would make one inevitable — by letting bank debt get much, much larger than GDP without batting an eyelid.

Now we’ve had the crisis, and if Carney’s speech is any guide, they’re once again letting private debt levels rip again, because even after the experience of 2008, they can’t see a problem. Given this complete failure of oversight, I expect that the sequel to the economic crisis of 2007 will appear before the next sequel for Godzilla.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of theMinsky software program.

 

Why Australia’s economic debate doesn’t rate | Business Spectator

Why Australia’s economic debate doesn’t rate | Business Spectator.

10 Feb, 7:09 AM 24

Douglas Adams’ brilliant comic farce The Hitchhiker’s Guide to the Galaxy describes Earth as residing in sector ZZ9 Plural Z Alpha, one of “the uncharted backwaters of the unfashionable end of the Western Spiral Arm of the Galaxy” and being inhabited by “ape-descended life forms” who “are so amazingly primitive that they still think digital watches are a pretty neat idea”.

Sometimes when I return to Australia, I feel that I’ve arrived in the planet’s sector ZZ9 Plural Z Alpha. Here the economic debate is so primitive that people still think the economy can be controlled by tinkering with the rate of interest.

Is inflation rising? Then put the rate of interest up one and a half times as fast as inflation is increasing. Is output falling below trend? Then drop the rate of interest by half as much as output has fallen. Then adjourn for drinks.

This formula, known as the Taylor Rule, was all the rage in Central Banks from the early 1990s until the mid-2000s. Economists were so confident that they had economic management nailed that they invented the phrase “The Great Moderation” to describe the Goldilocks state of the economy, and took credit for bringing it about:

The sources of the Great Moderation remain somewhat controversial, but as I have argued elsewhere, there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy (Bernanke 2004, emphasis added).

Then in late 2007 the world went to hell in a handbasket when the global financial crisis began. Mainstream economists were forced to abandon the belief that getting the rate of interest right was all that was necessary to keep the economy on an even keel. Instead, the rate was dropped to near-zero to in an attempt to stop the economy sinking below the waves.

The USA? A cash rate of 0.13 per cent. Japan? 0.1 per cent. Europe? 0.25 per cent. The UK? 0.5 per cent. No-one asks what the central bank will do to interest rates at its next meeting at one of those more fashionable sectors of this planet, because the conceit that the central bank can fine-tune the economy by varying its interest rate is long dead.

Figure 1: Cash rates around the world.
[wysiwyg_field contenteditable=”false” wf_deltas=”0″ wf_field=”field_wysiwyg_media” wf_formatter=”aibm_ui_media_output” wf_settings-style=”full_width” wf_cache=”1391976543″ wf_entity_id=”777046″ wf_entity_type=”node”]

But not in Australia. Here, what the Reserve Bank will do to the interest rate at its monthly meeting is big news. And because it’s big news, every month Sky News asks about 20 economists three (and lately four) questions about the RBA rates meeting on the first Tuesday of the month:

1) Do you expect the RBA to move on Tuesday? And if so, in which direction and by how much?

2) Where will the official cash rate likely sit by the end of the calendar year?

3) One thing you’re looking for in the RBA statement?

4) What do you THINK the RBA should do on Tuesday? (we’re asking for your opinion)

The first question I’ve likened to betting on which cockroach will get outside a circle first inChangi prison; it’s just gambling. On the second, I’ve consistently called for rates to be lowered, because in my opinion the main impact of our high cash rate – compared to the USA, Europe, UK and Japan in Figure 1 – has been an overvalued dollar that has decimated Australian manufacturing.

On the third and fourth, since March of last year, I’ve added a call that the RBA to introduce loan to valuation ratio controls to stop a property bubble forming. (Strictly, APRA would make such a call, but if the RBA said jump, APRA would do it.)

My answer to Sky News’ poll in March 2013 was:

1) I think the RBA will hold, but if there is any move it will be down;

2) 2 per cent

3) Realisation that (a) the cash rate is the main factor keeping the Australian dollar overvalued and (b) it has to do something to stop a housing bubble forming if it lowers rates–for example, reintroduce a maximum level for LVRs of say 90%.

But that’s all so yesterday. For last week’s poll, I changed my answers in a rather radical way:

  1. Zero
  2. 3.5 percent [1 per cent higher than today]
  3. Realisation that they are stuck with 4 competing goals: declining employment, rising inflation, a housing bubble and an overvalued dollar, and whatever they do with rates will stuff up at least 3 of those 4 things
  4. Introduce loan to valuation controls like those in NZ (via APRA), persuade the government to introduce limits on non-resident buying of properties, raise rates by half a percent to help burst the property bubble they’ve allowed to develop.

The answers were partly in exasperation, since the whole idea that all the Reserve Bank can and should do to control the economy is vary the interest rate is nonsense. I felt rather likeFord Prefect, livid at the inability of the Golgafrinchans to design the wheel:

‘And the wheel,’ said the captain . ‘What about this wheel thingy? It sounds a terribly interesting project.’ ‘Ah,’ said the marketing girl, ‘well, we’re having a little difficulty there.’ ‘Difficulty?’ exclaimed Ford. ‘Difficulty? What do you mean, difficulty? It’s the single simplest machine in the entire Universe!’ The marketing girl soured him with a look. ‘All right, Mr Wiseguy,’ she said, ‘you’re so clever, you tell us what colour it should be.’

So I answered that the colour should be “square”. And, by analogy, the interest rate decision is about as useful as a square wheel in controlling the economy. There are at least four factors the RBA should care about, and they’re giving conflicting signs:

  1. The economy: this has been heading down for some time, and is still generally heading down—which indicates that rates should be cut. So tick the ‘down’ box.
  2. Housing: We now have a housing bubble because of the RBA rate cuts since 2012—rate cuts that it didn’t expect to make since against its expectations, the economy has been going down (check Figure 1 again: the RBA was alone in raising rates from 2010 since it falsely thought that the economic crisis was over and inflation was about to rise once more). Since the RBA has been and remains too gutless to introduce prudential controls on mortgage lending—unlike the New Zealanders, who did so in August 2013—then it should put interest rates up to prick the housing bubble. So tick the ‘up‘ box.
  3. The currency: this has been overvalued for the last four years, thanks to our high interest rates, and though it’s fallen it is still above the RBA’s comfort level, let alone where the actual economy needs it to be (around 70 cents in my opinion). So tick the ‘down’ box.
  4. Inflation: though this has been consistently lower than the RBA has expected, it is now potentially moving up because the currency has fallen. So tick the ‘up‘ box.

That gives us two “up” signals and two “down” signals. So what to do? Sit on our hands, or stay in a bath for 5 years, like the captain of the Golgafrinchans.

Bugger that, I thought. The one thing the RBA has done courtesy of its primitive belief that interest rates alone can control the economy is allow a housing bubble to form once more. So let’s prick that – hence my call for a 3.5 per cent rate by June 30 (this month’s question asked for the rate by the end of this financial year).

Of course, if the RBA did that – which it won’t – then the currency would fly back over a dollar for sure. There’s no way I actually thought that would be the rate. But please, let’s stop being digital watch fans, and join the rest of the world in realising that there’s more to managing the economy than tinkering with the rate of interest.

Now I think I’ll go have a drink with Marvin

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of theMinsky software program.

Why economists are almost always wrong | Business Spectator

Why economists are almost always wrong | Business Spectator.

27 Jan, 8:13 AM 27

That verbose title is almost the reverse of a quintessentially arrogant statement of economic supremacy published in the UK’s Daily Telegraph – on the editorial page of the business section – by Andrew Lilico. Entitled “Economists are nearly always right about things, despite what you may think in the print edition, its content and tone encapsulated everything about economic theory, and economists’ blind belief in it, that led me to write Debunking Economicsover a decade ago.

Figure 1: Lilico’s article in the print edition of the UK Daily Telegraph
Graph for Why economists are almost always wrong

The two main factors that made that book necessary were the capacity of economists to intimidate opponents with their apparent depth of knowledge of a difficult subject, and the reality that economists knowledge of their own subject was, to coin a phrase, not even shallow: it was frequently outright wrong.

Lilico’s article contained numerous examples of this, but I’ll focus on an apparently esoteric one: his defence of the assumption of rational behaviour, which is an integral part of conventional economic theory. As a piece of prose, his defence of it is a gem of “logic” and linguistics that should have fans of Noam Chomsky rolling in the aisles, but that’s not why I’m quoting it here:

“But rationality is not an assumption of orthodox economic theory in that sense. Instead, it is what is called an “axiom”. No behaviour can prove that people aren’t, in fact, rational, because for an orthodox economist the only kind of explanation of any behaviour that counts as an economic explanation is an explanation that makes sense of that behaviour – that shows why the behaviour is rational. (Lilico, 2014/01/22)”

OK, now stop giggling (or put the brandy bottle away). Apart from the fact that this would show both committing suicide as rational (and yes of course there are economic theories that say it isand deciding not to commit suicide also as rational, it’s wrong about economic theory itself. This is because Paul Samuelson, the prime developer of the underlying theory of rational choice, reacted to precisely this criticism of economics as unscientific: if a theory can explain everything, it explains nothing – a point Lilico himself makes in taking a swipe at professional critics like me:

“Irrationality and other heterodoxy is usually little better than an all-encompassing conspiracy theory, explaining everything and thus nothing — for while many behaviours may not be rational, there is no behaviour that is not irrational. In the process, heterodoxy misses all that is fruitful and important.”

OK, he shot himself in the foot by blasting heterodoxy for “explaining everything and thus nothing” when precisely the same critique applies to his unfalsifiable definition of rationality, the treble negative in the penultimate sentence may necessitate another swig of brandy — and Chomskyites, get up off the floor. But let’s get back to Paul Samuelson and why Lilico doesn’t know what he’s trying to talk about.

In 1938, Samuelson (Samuelson 1938) developed what became known as “the axioms of revealed preference”, in response to criticisms that a key component of the economic concept of rationality was unobservable, and therefore more metaphysical than scientific — according toPopper’s definition of science.

This was the idea of subjective utility, and its representation in so-called “indifference curves” that John Hicks recently devised. Samuelson, in other words, wasn’t happy that the theory rested merely on unchallengeable beliefs — yet Lilico believes he’s defending economic theory by claiming that rationality is an uncontestable “axiom”. This is typical: mainstream economists like Lilico don’t know the history of their own discipline, let alone know much about its flaws.

The economic literature also contains a disproof of Lilico’s dismissive “No behaviour can prove that people aren’t, in fact, rational”. In fact, Samuelson designed his  “axioms of revealed preference” so that it would be possible to test the behaviour of people, and conclude whether they were or were not rational. These axioms of rational behaviour were:

  • Completeness: shown any two shopping trolleys full of goods, a consumer could say which one she preferred (or if she was indifferent between them).
  • Transitivity: if the consumer preferred trolley A to trolley B, and trolley B to trolley C, then she necessarily had to prefer trolley A to trolley C.
  • Non-satiation: if she was indifferent between two trollies A and B, throw one Mars Bar into trolley A and she must prefer A to B.
  • Convexity: this is a bit trickier to explain. If she was indifferent between trolleys A and B, then any trolley containing a mixture of the goods in A and B would have to be preferred to A or B.

Samuelson’s argument was that, if a consumer behaved rationally as defined by these axioms, then you could present them with a whole range of shopping trolleys, and derive what their “indifference curves” were — so it wasn’t true that they were “unobservable”, you could actually derive them from empirical research.

In the late 1990s, the German economist Reinhard Sippel decided to test this in a meticulous experiment: he presented his students with sets of prices that they could use to “buy” a handful of goods, where the choices were set up to test how rational these students were according to the “axioms of revealed preference”.

The substantial majority of his students turned out to be “irrational” according to the theory of rational behavior, because they violated some or all of these axioms. They’d choose a trolley A instead of B one time, and then B instead of A another; given a choice between A and B, they’d choose B, then between B and C, they’d choose C, and then between C and A, they’d choose A.

Were they “irrational”? No, of course not: it’s the mainstream economics definition of rational that is “irrational”, because it ignores the blinding complexity that exists even in what appears to be a simple choice between different combinations of a handful of goods — say ten goods for example, where you could buy between zero and nine units of each.

How many shopping trollies could you fill with different combinations of those ten goods? One hundred million of the buggers. Try to imagine a parking lot filled with 10,000 shopping trollies in one direction, and 10,000 in the other. Do you think that (given a set of prices and an income constraint) you could easily pick the one you preferred out of all others you could afford?

Of course not. So what you rationally do is you ignore many of those combinations, using grouping of different goods together (“buy fruit” rather than “buy apples or oranges or bananas or…” according to what’s cheapest), follow habit (“Dad, why do you always give us turnips?”), custom, etc. So rational behavior isn’t what Samuelson defined it to be — to consider all options and pick the best — but to reduce the complexity of your decision-making process in sensible ways so that you can make a satisfactory decision in finite time.

I have great respect for Sippel because I am sure he thought, when he set the experiment up, that he would both vindicate the theory and bring it alive for his students. Instead, he looked at the experimental results and concluded that they contradicted economic theory:

“We conclude that at the evidence for the utility maximization hypothesis is at best mixed… we would like to stress the diversity of individual behaviour and call the universality of the maximizing principle into question…,” he said. “We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our `imperialist ambitions’ of explaining non-market behaviour by economic principles.

Sippel’s reaction to his experiment was the mark of a real scientist. Lilico’s defence of economics despite its many empirical failings is the mark of a zealot. That is the real weakness of mainstream economic theory: that it engenders in its followers a manic belief that is impervious to empirical reality.

Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program.

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…

 

When economic theory fails the maths exam | Business Spectator

When economic theory fails the maths exam | Business Spectator.

When economic theory fails the maths exam

 9 Dec, 7:44 AM

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 RoubiniDean BakerAnn PettiforMichael HudsonWynne 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
Graph for When economic theory fails the maths exam

Figure 2:Something else to ignore because it doesn’t pass the a priori test
Graph for When economic theory fails the maths exam

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
Graph for When economic theory fails the maths exam

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
Graph for When economic theory fails the maths exam

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.

9 Mind-Blowing Facts About Money | Washington’s Blog

9 Mind-Blowing Facts About Money | Washington’s Blog. (FULL ARTICLE)

China Invented Every Form of Money

China:

  • Seized gold six centuries before Franklin Roosevelt, in order to prop up its fiat currency and prevent runaway inflation

Debt Forgiveness Is The Basis of Modern Civilization

Religions were founded on the concept of debt forgiveness.

For example, Matthew 6:12 says:

And forgive us our debts, as we forgive our debtors.

Periodic times of debt forgiveness – or debt “jubilees” – were a basic part of the early Jewish and Christian religions, as well as Babylonian culture.

David Graeber, author of “Debt: The First 5,000 Years” told Democracy Now:

If you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that’s where concepts of redemption originally come from.

Ambrose Evans-Pritchard wrote in 2009:

 

%d bloggers like this: