faulty Fed figuring

[Federal Reserve Chair Janet] Yellen said at least one thing of importance last week.... She confessed to the frightening truth that the Fed formulates its policies and actions based on forecasts of future economic developments. [Unfortunately] our monetary politburo couldn’t forecast its way out of a paper bag.... [I]t’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed U.S. economy and that balance sheets don’t matter....

[T]he economy is now seamlessly global, meaning that everything which counts -- such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks -- is planetary in nature.... Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidge to confirm the U.S. economy’s strength and that the Keynesian nirvana of full employment is near at hand....

[I]n today’s world of global labor competition in goods, offshored business services, episodic domestic gigs, temp agency labor delivery, and Wal-Mart style labor scheduling by the hour and time of day, week, month, and season, the whole idea of “full employment” is a relic.... [Labor distribution factors] shift and morph steadily over time and in response to new technological and cultural developments. They are utterly beyond the reach of 25 basis points of interest rate shifts on the money markets. So the unemployment rate tells you almost nothing useful. By contrast, there are an immense number of leading indicators which track the global credit bubble and false boom it enabled. They bear far more directly on the main street outlook than does the Fed’s primitive bathtub model of the US economy. 

-- David Stockman (The Daily Reckoning) Dec. 22, 2015

central planning fails

Aristotelian logic came to dominate Western thought after the Renaissance. It was essentially a forerunner of positivism — which is supposedly based on objective conditions and scientific reasoning. “Give me the facts,” says the positivist, confidently. “Let me apply my rational brain to them. I will come up with a solution!”  This is fine, if you are building the Eiffel Tower or organizing the next church supper. But positivism falls apart when it is applied to schemes that go beyond the reach of the “herald’s cry.”  That’s what Aristotle said. He thought only a small community could work at all. Because only in a small community would all the people share more or less the same information and interests.

In a large community, you can’t know things in the same direct, personal way. So it’s hard for people to work together in the same way.  In a large community, you have no idea who made your sausage or what they put in it. You have to rely on “facts” that are no longer verifiable by direct observation or personal acquaintance.  Instead, the central planners’ facts usually are nothing more than statistical mush, wishful thinking or theoretical claptrap — like Weapons of Mass Destruction, the unemployment rate and the Übermensch.  Large-scale planning fails because the facts upon which it is built are unreliable, frequently completely bogus.  And it fails because people don’t really want it.

-- Bill Bonner, The Daily Reckoning (March 6, 2013)

economists' numbers

Economists are not stupid. Especially those who win Nobel Prizes. They test well. They go to good schools. They can usually do higher math. Math is important to modern economics. It makes it look like science. So, if you review almost any PhD thesis in economics over the last 20 years, you are bound to find numbers. Lots of numbers. You’ll also find symbols. Greek symbols. And symbols from the mathematician’s trade. These symbols mean something. So do the numbers. And you can use these meanings to tease out even more confections. Complex. Sophisticated. Precise. Impressive. And generally not worth a damn. 

We say that after long observation. It is the result of careful reflection and reckless intuition. The observation has occurred over the last dozen years or so. Despite all their numbers, formulas and Nobel prizes, America’s leading economists, including the lead dog economist himself, Ben Bernanke, were apparently unable to see something so obvious that even we spotted it: the collapse of housing and the blow up of the credit market. Not that they are dumb. They are just following a different career path. 

A genuine economist keeps his eyes open. He reads the paper. He reads books. He studies history. He talks to taxi drivers and businessmen. He tries to understand what has gone on in the past... and what might be going on today. He has no illusions about it. The future will never be like the past. But there will be similarities. And those similarities can be studied. He has little appreciation for numbers. He knows they can’t be trusted. They are like whores and lobbyists — they will do their work for whomever pays them. He is especially wary of precise numbers. The greater the precision, the greater the lie. 

With their vision obscured by all their precise numbers and enhanced calculations, most economists could not see the crisis coming. On the evidence, their numbers are not very useful. But now they bring them out again... this time to solve the problem they never saw coming. 

-- Bill Bonner, The Daily Reckoning (July 19, 2012)