Thursday, April 02, 2015

The Inevitable Failure of Mechanistic Monetary Policy

Our current faith in central banks' ability to "make the economy all better, all the time" is horrendously misplaced.


We are living in the Cargo Cult Era of Central Bankers. The era began in earnest on December 5, 1996, when Federal Reserve chairman Alan Greenspan cautiously wondered aloud if the stock market was exhibiting "irrational exuberance."

The stock market promptly tanked. In this era, the utterances of central bankers exert more influence over markets than fundamentals.

This simplistic faith in the Cargo Cult magic of central banks is based on the absurd notion that two levers--interest rates and buying debt--can control and guide an immensely complex economy. Central bankers are well-versed in arcane incantations such as Operation Twist and aggregate demand, but if we strip away the mumbo-jumbo we find only two levers: interest rates and the purchase of debt.

Documentary film maker Adam Curtis explored the inherent limits of mechanistic monetary models in Episode 3 of his 6-part series, Pandora's Box (1992).

The wizards of monetary policy make the implicit assumption that monetary policy is the most important factor in an economy's expansion or contraction. But an economy is far more than interest rates, inflation and the purchase of bonds and other assets.

An economy is also the education or mis-education of the next generation of workers, the creative destruction wrought by technologies, the cultural appetite for risk and what I call the infrastructure of opportunity--the complex mix of attributes that either encourage social mobility or preclude it.

Two analogies will help us understand the absurdly simplistic myth of central bank magic. One is the forest fire analogy I discussed in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009).

In essence, central banks no longer allow the "fires" of debt writedowns and credit contraction (i.e. recession) to burn away the dead wood that piles up after rapid expansion/good times/ leverage. As a result, the dead wood piles up higher and higher every season, until a chance spark (the infamous Black Swan) ignites the dry tinder and the subsequent conflagration burns down the entire forest.

The second analog is health-related.A fellow in very poor health goes to the clinic for a blood pressure test. He is overweight, dangerously unfit, smokes a pack a day and self-medicates himself with daily overdoses of alcohol. As a result of his disastrously poor health, is blood pressure is through the roof.

In our analogy, the stock market is the blood pressure reading. Markets (stocks, bonds, commodities, real estate, debt, risk, etc.) reflect the realities "discovered" by the interplay of buyers, sellers and information such as profits, debt levels, sales, etc.

Rather than address the underlying causes of the patient's poor health, the doctor (central bank) gives the guy two powerful drugs to slam down his blood pressure reading. This is the equivalent of central banks juicing markets with quantitative easing and zero-interest rates (ZIRP).

Is the guy healthier as a result of the massive injections of drugs? At least temporarily, his chances of dying are reduced by the drop in blood pressure. But over the longer term, this doctoring of one reading of health (i.e. the stock market) is not going to reverse the intensely negative consequences of poor diet, zero fitness, smoking and over-consumption of alcohol.

Our current faith in central banks' ability to "make the economy all better, all the time" is horrendously misplaced. Mechanistic monetary models are fine for manipulating a simplistic measure of economic health, but they are completely inadequate to the task of restoring fundamental health to a very sick patient teetering on the abyss.

Bonus analogy: here's the Fed's Cargo Cult vehicle to a 21st century economy:







Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle edition
Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube) 



NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Michael K. ($5/month), for your splendidly generous subscription to this site-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP