Monday, September 24, 2012

More Macro Quackery

Noun: 2. A person who pretends, professionally or publicly, to skill, knowledge, or qualifications he or she does not possess; a charlatan.

Adjective: 3. Being a quack: a quack psychologist who complicates everyone's problems.
4. Presented falsely as having curative powers: quack medicine. 
5. Of, pertaining to, or befitting a quack or quackery: quack methods.

Verb (used with object): 7. To advertise or sell with fraudulent claims.

Physical science offers observable phenomena.  The temperature when water boils is observable and provable.  Water freezing?  Check.  Wing design is subject to various laws of lift and drag.  Automobile fuel efficiency is determined by engine size, vehicle weight, and drag, among other physically observable factors.

In the life sciences, while there is more variation than in physical sciences, it is still possible and expected that tests are designed to determine the efficacy and safety of various pharmaceutical and other interventions (of course, rather subject to political influence – however, this does not change the nature of the science and the possibility of testing).

Free markets offer opportunities for experimentation, without running the risk of devastation to the entire economy.  Every new product is subject to success or failure – without causing systematic harm.  Even success or failure of Apple’s new iPhone, as large a story as this is, will result in relatively little impact to the overwhelming majority of market participants.

Not so in macro-economics.  The practice of macro-economics has been structured such that the experiments are conducted on the entire population in real-time.  The economy is the experiment.  Via central banking and state-intervention in the economy, there is little opportunity for trial and error in an isolated environment.

The most devastating such practice is that of central banking.  The single most important factor in the division of labor (and the standard of living this makes possible) is the factor of money and credit.  Yet this factor is not subject to trial and error in a limited and controlled environment.  It is offered a monopoly position, virtually everywhere throughout the world.

Further, it is a field where every practitioner has an opinion, and most of these opinions are subject to nothing more than argumentation and debate.  None of the opinions is subject to testing in the market – in the way that even a simple candy bar must prove tasty, for instance, before it provides a return to the manufacturer.

With this in mind, I offer the following quotes and statements from today’s Ambrose Evans-Pritchard commentary.  Note the number of different opinions offered, none of which are subject to a market test.  Those offering such quackery – hoping to directly or indirectly influence policy – do so in the laboratory that is human life, effecting billions with these unproven and un-provable prescriptions and recommendations.  Keep in mind: it is quackery, and such quackery has led to devastations up to and including total war.

To begin: even after the fact, the quacks cannot agree on the root causes for the sickness.  New interpretations are offered regarding causes for the economic calamity since 2008:

Fed chair Ben Bernanke kept policy far too tight after the US economy buckled in early to mid 2008. He allowed a collapse in the money supply to run unchecked, causing avoidable disasters at Fannie, Freddie, Lehman, and AIG later that year.

…three heavyweight books now lay the blame squarely on the Fed: the 'Great Recession' by Robert Hetzel, a top insider at the Richmond Fed; 'Money in a Free Society' by Tim Congdon from International Monetary Research; and 'Boom and Bust Banking: The Causes and Cures of the Great Recession' by David Beckworth from Western Kentucky University.

Without finding shame in the fact that even recent history cannot be explained, by the dozens prescriptions are offered for the present and future:

Simon Ward from Henderson Global Investors says the Fed is committing yet another "pro-cyclical" blunder, gunning the economy just as the money supply is coming back to life anyway. "The Fed’s decision to launch QE3 was at best otiose and at worst will prove destabilising," he said.

He fears the stimulus will hit before companies are ready to crank up output. It is a recipe for inflation. "Yet again, incompetent, short-termist policy-making risks wrecking a promising economic outlook."

Tim Congdon says the case for further QE is "far from compelling".

He too suspects that the Fed has over-egged the pudding. The economy will take off in early 2013. Bernanke's pledge to keep interest rates near zero until mid-2015 will prove "folly of a high order". Inflation will force him to tighten much earlier in a humiliating volte-face.

Nathan Sheets from Citigroup -- an expert on "stall speeds" from his Fed days -- said that once the US economy has slowed to 1.5pc growth on a "rolling four-quarter basis", it tends to fall 3pc over the following year and takes the world with it.

[Bernanke] seems to have espoused a variant of the "7/3" proposals of Chicago Fed chief Charles Evans: that they will keep adding stimulus until unemployment drops to 7pc, so long as inflation stays below 3pc.

His colleague Narayana Kocherlakota has even talked of a 5.5pc jobless target…

Modern monetarists -- or market monetarists [what an oxymoronic term] as they call themselves -- have achieved a bittersweet victory. They have been calling for QE3 all year. They are widely credited with forcing the Fed to capitulate. Their influence is now extraordinary.

"Targeting real variables is a potential disaster. Expansionary monetary policy seeking an unfeasible target for unemployment was the key error that generated the Great Inflation of the Seventies," [Bill Woolsey] said.

The Fed is barking up the wrong tree with its doctrine of credit yield manipulation, or "creditism", straying far from the quantity theory of money.

None of these economists know the right answer.  They don’t know.  They cannot know.  It is impossible to know.  These are all guesses – none of which are subject to market discipline, any of which can be disastrous to the economy.  Yet these are acted upon, chosen, and implemented by a small, chosen few.

The quantity, quality, and variety of money and credit can only properly be determined in the market, free from monopoly, free from government protection.  Centralization of banking, money, and credit – managed and influenced by a handful of individuals – is quackery.

Who is right, who is wrong?  In free-markets, this is determined in thousands of little experiments – every one subject to success or failure, and none of which can grow so large as to take down the entire economy. 

Each of these macro-economic quacks should be set free to design a money and banking system and sell it to the market.  They can each experiment to their heart’s content risking only the money of those who invest or otherwise utilize their schemes.  Remove the monopoly, and each can put his money where his mouth is.

Competition and free markets have solved thousands of problems far more complex than money and credit – and in the past, free markets have resolved money and credit as well.  It is time to allow markets to do so again, and free mankind from the evils of this quackery, practiced on all.

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