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Dylan Grice On Ignoring The Economists’ Perpetuation Of The Illusion Of Control, And Instead Focusing On What We Do Know

Zero Hedge
Monday, September 6, 2010

In his most recent Popular Delusions piece, SocGen’s brilliant Dylan Grice once again rightfully demolishes the shamanic rituals of the “alternate universe” theory, better known as economics, ridicules economists for the hack priests of financial paganism they are, and concludes what may be the key principle of modern cynical thought: “Some have said that the key risk investors face today is of ‘policy error’. But isn’t that always the key risk? Financial history is one long series of ‘policy errors’ and while policy makers labour under the delusion that they know the unknowable it will remain so. All investors can do is try to see the funny side, and focus on things we can know.” Incidentally, focusing on the funny side is precisely what Zero Hedge has been doing for just over a year and a half (much to the dismay of our ever growing detactors and critics). Add some intelligence to the discourse, and one gets in 18 months more actual policy changes (Fed Audit, the end of Goldman Prop (a topic we were digging into long before Volcker was resurrected from the dead), banning Flash trading, inquiry into High Frequency Trading and daily market manipulation), more than others who in lengthy, rambling, somnolent, rants and essays have achieved in decades. Since mixing humor and “focusing on what we know” is all we know, we will continue doing it, until we succeed in terminally discrediting the most worthless voodoo “science” ever conceived by man – economics, and overturning its one most destructive construct – the central bank and the implicit central planning that goes side by side. But in the meantime, here is Dylan’s most recent fusion of humor and scathing condemnation of the idiots who will gladly destroy the US economy in their pursuit of a theory which is proven to be more and more flawed, fake and destructive with each passing day.

Dylan on the basis of the illusion of control:

The pedestrian ‘push’ buttons at New York’s intersections don’t actually work. They were deactivated in the 1970s when computer-controlled automatic traffic signals were installed but left in place because removing them is too costly. Apparently most ‘close door’ buttons in lifts don’t work either. But give us a button and we’ll press it, not because the button works but because the sense of being in control makes us feel good (when subjects are crammed into a lift for example, those closest to the controls show lower stress levels). Feeling in control doesn’t mean that we are in control, but who cares? As Slartibartfast said in Hitchiker’s Guide to the Galaxy, “I’d rather be happy than right!”

Slartibartfast would have been a splendid economist. Squabbling amongst themselves in the press – when fiscal retrenchment should proceed; where monetary policy should go from here; how to avoid deflation; etc – they use loaded words such as “optimal”, “equilibrium” and “calibration”, language which gives the impression of learned discussion between experts who understand their subject matter. In fact, the overwhelming evidence of regular financial calamity (which has unambiguously increased as central banks have gained influence, see chart below) clearly demonstrates that they do not. But that doesn’t deter our brightest economists from happily believing their own propaganda. They really think they’re in control!

Let them press their buttons. Let them believe they know the unknowable if, like Slartibartfast, it makes them happy. Frankly, there’s not much we can do, other than allow the occasional giggle and avoid making the same mistake of failing to accept that some things just can’t be known. Our effort and energy should focus on what can be.

On the creation of ad hoc theories to explain a constantly changing reality, on their endless inability to predict even one day into the future, and on covering up that economists are really just the most insecure, unintelligent, overrated hacks ever produced by Ivy League universities.

A famous MIT economist earnestly warns on a prominent website that “the US may be near a liquidity trap” where monetary policy may no longer be ‘effective’ (whatever that means: effective at what, inflating bubbles?) Fear not though, and let the trumpets sound out, for our macroeconomists are riding to the rescue “ … the ineffectiveness of monetary policy can be turned on its head by using money creation to finance fiscal policy stimulus – such as a large but temporary cut in sales taxes. To avoid future problems, the Treasury could commit to transfer resources back to the Fed when the economy is back to full employment.” This is a brilliant solution … it’s smart … it might even be sexy. But there’s one glitch – how do we know when we’re at full employment? Didn’t the Irish think they were at sustainable and full employment in 2007, only to discover that they had been dangerously overheating?

Not to worry, another report on my desk warns against premature austerity. To give its argument added weight it quotes Keynes: “The boom, not the slump is the right time for austerity.” The authors are concerned that mistimed government retrenchment might cause more unemployment than necessary. Who would argue with such sentiments? Who wants to see high unemployment? But how will they know when the economy is booming? Knowing when it collapses is easy enough: spikes in unemployment hurt; market panics hurt … but booms? Like full employment; how do we know when we’re there?

During the boom, Ben Bernanke didn’t know it was a boom and dismissed the very notion of a US housing bubble. During the boom, the clever economists at the helm, who today diagnose the economy’s ills and confidently suggest its remedies, said then that the cycle had been tamed, that leverage which was once dangerous was now prudent. During the boom, the UK’s Chancellor boasted that he’d “put an end to boom and bust.” During the boom, the few lone voices pointing out the dangers of the credit inflation were dismissed as “perma bears” During the boom, everyone thought the boom was normal, leading us to where we are today. There was certainly no talk of ‘austerity.’

…On what we don’t know (or at least what we should admit to those reading us, we have no clue). And yes, this is directed solely at Paul Krugman, and all the other prize Keynesianites of the world.

Never mind. Keynesian poster boy and Nobel prize winner Paul Krugman gushes over Richard Koo’s conclusion that even though Japan’s level of nominal GDP today is lower than it was in 1992, the nearly two decades of fiscal stimulus was the most successful in history, for without it Japan would have experienced a much worse decline! Conclusion? We need more fiscal stimulus to get the economy back to ‘full employment’… forget for now that no one has, has ever had, or is ever likely to have any accurate idea of where ‘full employment’ is: macroeconomists are now basing policy recommendations on intrinsically speculative and unprovable counterfactuals! I understand the intuition, but he can’t know that Japan’s stimulus has improved the lot of its people, or indeed what the full consequences of the stimulus are.
Dylan Grice On Ignoring The Economists Perpetuation Of The Illusion Of Control, And Instead Focusing On What We Do Know Public%20Debt 0

I could go on … the FT reported on 1 September (see Greece debt default seen as ‘unlikley’ – the IMF estimates of the UK and US’s “fiscal space” and the conclusion that they can increase their debt by another 50% of GDP without a crisis. I hope they’re right, but their guess is as good as my cat’s. There just is no “trigger” beyond which debt crises happen (chart above) and we have no idea how much “fiscal space” governments have until they have none …

…On what we do know, or what we should do with the things we have some control over…and not just a Keynesian illusion thereof:

But what can we do? Chuckle, and focus on doing homework in areas where we at least have a chance of knowing. We know, for example, that scarcity is developing in certain commodity markets and that China’s age of self sufficiency in things like coal and grain is probably over. We know that historically when a large producer has turned to world markets those markets have become vulnerable to violent upward spikes. We also know that wars have frequently been fought over scarce resources and that China now has more fighter ships than the US.

Dylan Grice On Ignoring The Economists Perpetuation Of The Illusion Of Control, And Instead Focusing On What We Do Know China%20Warships 0

We know that the developed economies’ demography is set to decline and that while we’re not sure what the effect will be, that Japan’s experience isn’t encouraging. We know that overstretched government balance sheets have historically posed an inflation risk but that bond yields are at levels rarely seen in the past few centuries, let alone decades. We know that entry valuations determine long-run returns and so bonds are likely to be an appalling investment here. We also know that while equities still aren’t cheap in an absolute sense they’re as cheap as they’ve been since the crash of 2008, so there are bound to be opportunities within these markets for providing decent long-run returns (see chart below). And we know that as we’re exploring the many (hopefully) profitable areas in the coming months, the Slartibartfasts will be in their fool’s paradise, pressing their buttons and in their own tragi-comic way, adding to the richness of the whole experience.

Dylan Grice On Ignoring The Economists Perpetuation Of The Illusion Of Control, And Instead Focusing On What We Do Know Equities%20Cheap 0

And people wonder why we don’t offer wholsale policy suggestions – indeed, what is the point when the entire house of cards is doomed by daily gyrations as the entire market and all investors can’t focus their attention on anything more than a few seconds into the future, even as the reality behind the flashing stock tickers is turning darker with each passing day… Just sit back, relax, and watch the show as it unfolds. It will be hilarious from start to (imminent) finish.

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