Thursday, February 22, 2018

An Impossible Task

Tell him to buy me an acre of land,
Between the salt water and the sea sand,
Tell him to plough it with a ram's horn,
And sow it all over with one peppercorn,
Tell him to sheer't with a sickle of leather,
And bind it up with a peacock's feather,
Tell him to thrash it on yonder wall,
And never let one corn of it fall,
Then he shall be a true lover of mine.

-        Female Part, Scarborough Fair

John Mauldin has written a piece on the task of the Federal Reserve.  The title is sufficient to disabuse anyone of the idea of central planning money and credit – although the title only tells part of the story: Data-Dependent ... on Imaginary Data.

He begins with the oft-stated mantra by the Fed: “our decisions are data dependent!”

…how could their policy choices not be data-dependent? The only alternatives would be that they made decisions randomly or that there was an a priori path already determined by previous Fed policymakers that they were forced to comply with.

Or that they make decisions politically….

He asks: are they looking at the right data?  Is the data accurate?  We know the answer to the first: it isn’t the right data because it can’t be the right data – the right data can’t be measured; the right data is tens of millions of individual decisions every day, not yet even know to the actors, let alone to the Fed.

Well, if it isn’t the right data, it doesn’t really matter if it is accurate, does it.  But it isn’t accurate, either.

Mauldin cites an op-ed by Jared Bernstein (bolded by Mauldin):

Recent events have exposed a hole in the middle of economists’ knowledge of key economic parameters: We know neither the unemployment rate at full employment nor the potential level of gross domestic product (GDP).

Recent events?  What about 2008?  What about every bust since 1913?

In any case, that’s a problem if you want to centrally plan money and credit.  But no respectable writer will label the Fed’s work as communist-style central planning.  As is pointed out often enough to me, I am no respectable writer.

Mauldin continues by offering several ways by which such economic statistics are little more than guessing.  He doesn’t offer that they are guesses about wrong things, but in many cases this is also true.  For instance, why is GDP considered to measure the health of the economy?  Do you measure your economic well-being by how much you spend?  Is it irrelevant what you spend your money on and why?

The various hurricanes and fires of the last year have been a boon to GDP – a boon to spending.  What does this say about the health of the economy?  The best case is a return to where we were before these tragedies.  Does the broken window fallacy come to mind?

GDP is good for one thing: it measures state-accessible-product.  Much of taxation is dependent on economic activity, and GDP measures economic activity.  That’s it.

Mauldin accepts that the Fed must act on such whimsical data; this despite comparing the Fed to your doctor or an airplane pilot: would you trust either of these professionals with your life if all they had was data as useless as GDP and unemployment?  Of course not:

All this is very obvious to people who lack graduate degrees, yet for some reason the economics profession persists in thinking it knows things it simply does not. Economists have physics envy. They want their profession to be a hard science, when it is probably one of the softer of the soft sciences.

If the market is competent to set long-term rates or LIBOR, then maybe we should trust the market to set short-term rates.

This is the closest I have heard Mauldin come to suggesting an end to the Fed.  But he doesn’t.  The Fed governors should be more humble, but central planning should not be discarded:

That doesn’t mean there would be no role for the Fed. There are points in the economic cycle when the Fed can be quite useful, typically during a liquidity crisis that follows hard on the heels of too much irrational exuberance.

Irrational exuberance.  Let a few major money-center banks go belly up (along with the wealth of its stockholders, bondholders and executive management) next time and you will go a long way toward purging the system of irrational exuberance.  In other words, if there is some reason for the Fed to exist, it shouldn’t be to bail out stupid banks.


Think about this: 12 people sit around a table, chew the fat over masses of data and metadata, and then set the price for the most important commodity in the world: the US dollar, the world’s reserve currency.

Yes, think about this.  It doesn’t take much thought to conclude that this is a power no small group of people should have; it is a responsibility that is impossible to carry out.  It is central planning “for the most important commodity in the world.”

I have a better idea: End the Fed.


  1. I think you're preaching to the choir here, Bionic.

    I believe the reason the FED exists has nothing to do with economics and everything to do with enriching and empowering the few at the expense of the many.

    Mainstream economics will continue to be Keynesian, simply because that's where the money is - that is, there is an artificial market for Keynes created by government demand. No matter how many failures, no matter how absurd their claims, they will continue because Keynes "justified" government involvement in the economy.

    Nobody can expect the sociopaths we put in office to give up that kind of power.

    1. "I think you're preaching to the choir here, Bionic."

      Maybe, maybe not. It has been quite a while since I last wrote a piece on this topic; many new readers here, drawn by the topic of liberty and culture, etc.

      Anyway, I don't write on this much - but sometimes the softball thrown my way is way to tempting to take.

    2. He is preaching to the choir. In our case, but he has a point. New readers and all.
      Anyhow, nice summations, guys. I sometimes need a little taste of sense in this cwazee world.

  2. This is one of my favorite eEconomics (economics for the digital age) episodes by David Angelo. He discusses trickle-down economics and how leftists cry about tax cuts for the rich (even though the rich pay higher percentages and much more in total taxes) but are totally clueless about the Fed and its massive program of Wall Street Welfare.

    Then there are the intellectual frauds like Robert Reich and Elizabeth Warren who make inequality their number one crusade and yet neither mention the Fed in anything even remotely resembling disparaging tones. Warren in particular is atrocious on this issue because she claims to be the people's defender against the big bad banks.

    The most hilarious group to me in regards to the Fed, however, are the leftists who recognize the evil of the Fed, but think it is only bad because it is 'privately' owned (never mind it was created be an act of congress, its profits are remitted to the Treasury, and the Federal Reserve Chairman is appointed by the President). Why can't leftists just learn economics or just some immediately available facts?

    1. I've been having the discussion "why won't you just learn some economics..." with a leftist cousin, lately. His response is essentially, too many schools of thought reflect an inability for validity. Each school is seen for its ethical positions and policy proposals only. Why would he want to pursue his own indoctrination?

      I replied about method and deduction, he really went off on a tangent about economics as religion after that.

      I know how exactly where the arguments are to refute him, but they're not short or simple, to the point that to get there requires lecturing or reading. One method requires desire on his part, the other requires him to be lectured to by someone he disagrees with.

      Like Keynes said, we are all the slaves of some defunct economist. And our internal theory, right or wrong, has been forming our entire lives. Economic views are absolutely indoctrination and form world views. It's important to form the right views on economics in your children because the schools and the "intellectuals" are working the wrong ones every day. Just because it is indoctrination doesn't mean it is necessarily false.

      As Mises said, all education is indoctrination with other people's ideas. Few people are smart enough to contribute anything both new and meaningful to thought.

  3. Voodoo central planning:


  4. Economists at the Fed and most other central banks believe that they bypass the logical implications of scarcity like the Road Runner can bypass the logical implications of the law of gravity simply by being intentionally ignorant.

    The real issue however is that central banks across the world have tired of buying low yield bonds and have upped their game into the purchase of equities. So now these central banks have every incentive not to be run out of town by their own subjects so now they are all in with the US equity markets. Do they know that APPL and GOOG don't owe them anything? What a stupid question, they don't care, they can always make up any losses by entering numbers into a computer.