|
-- Posted Saturday, 22 February 2003 | Digg This Article
December 2, 2002
Outline:
Statement of the 12 Counts
Preface
Nature of Economics
Illiteracy Among the Public
Academia’s Ivory Tower
Counts within Indictment
Friends of the Court
Conclusion
The people of the United States of America hereby declare charges against
the Economist profession in a class action, outlining 12 counts of
incompetence resulting in economic instability, severe distress to the
corporate sector, and personal hardship to the citizenry. Details of the
counts include some stern questions. The attorney for the people will be
the self-appointed Jim Willie CB, whose true identity will be protected.
Exhibit links are offered as evidence.
COUNTS WITHIN INDICTMENT:
1) Ignorance and Revision of History
2) Intellectual Support of an Intervention Policy
3) Disputable Assumptions used as Policy Foundation
4) Myopic Statistical Analysis Methods
5) Incomplete Statistical Analysis System
6) Legislative Divisions to Promote Political Agendas
7) Institutional Conflict of Interest
8) Distortion in Economic Reporting
9) Pursuit of Public Adulation by Fed Chairman (Pied Piper)
10) Collusion with Corrupt Financial Power Elite
11) Deceptive Indoctrination of Economic Definitions
12) Benign Negligence during Pillage of National Gold Treasure
PREFACE:
My qualifications for assuming the prosecutor role are 22 years of
experience in practicing statistics in the business world, backed by a
Ph.D. in Statistics from a leading university and two years of teaching
practice. I have worked in the computer industry, in the retail sector,
and in a private consulting firm. Contact with academia, work associates,
and former government statisticians has enabled me to acquire a
second-hand view of inner workings at various federal agencies. My
personal practice, as well as discussions with colleagues and managers,
have allowed me to develop and refine an objective opinion regarding the
Economist profession. While much of their work is competent, an acidic
vein runs through much of their work. Vibrant statistical lifeblood has
been largely displaced by political inspiration. Work might frequently be
described as analytically shoddy, deceptive in representation, and
clinging to heretical methods. Lately, psychological defensive fronts
have been opened, with the deceptive redefinition of economic terms. Has
Political Correctness now infected economics?
This indictment is not intended as humorous, nor as legally binding.
Before citing the 12 counts in detail, I will expand upon three critical
factors creating conditions ripe for exploitation by this bungling
profession. The nature of economics renders deficient policy nearly
impossible to disprove. Most challenges degrade into a useless political
debate. Illiteracy among the public leads to submission, silence, and
blind trust. The public either accepts the system for what it is, or
distrusts it while feeling helpless. Academia has built an Economist
Ivory Tower with the majority of paths more political than analytical.
The eyes of Nobel are very much aware. The leading academic Economist
communities have mutated into Political Priesthood, hawking ideology every
bit as much as Karl Marx. After delineation of the charges, a conclusion
is offered as I cite Friends of the Court, whose numbers are few, but
whose economic forecasting efforts are significant and expert.
THE NATURE OF ECONOMICS:
The Economics field does not lend itself easily to “controlled
experiments” in a scientific method framework. One cannot submit
contending policies within an experiment in tax rates or federal
subsidies, for instance, in order to test which policy produces the
desired intended effect for both business encouragement and federal
revenue generation. Nor can one submit the population or a given business
sector to a formal factorial design, rotating experimental settings on a
quarterly basis in order to carefully analyze policy alternatives under
examination. Such is too impractical. However, the United States does
offer diversity whereby certain states can supply valuable laboratory
information on competing policies. State leaders, regulatory officials,
and consulting analysts routinely learn from the successes and failures
observed within our 50 states. But comparative results are tainted by
what are called “confounding factors.” What succeeds in Massachusetts or
Ohio might not work in North Carolina or Texas. The people are different,
as are educational backgrounds, proximity to labor talent, geography,
natural resources, and state laws & taxation.
A critical requirement within an experiment calls for holding other
factors constant. Economics simply cannot enforce such constraints when
determining the success of certain policy options. One cannot duplicate
the weather, or external events, let alone policy interference on rules of
the game. Far too many participants are involved in setting policy --
state legislatures, municipal boards, federal agencies, and independent
committees. Most are influenced by corporate lobby efforts. Competing
companies do not stand still either. Typically, experiments devised for
statistical analysis are absolutely chock-full of confounded effects. The
problem is so pernicious that even experts fight loudly and emotionally
over the results of changed policy, each attempting to discredit the other
while pointing a finger at what they consider a deflected confounding
effect. The consequence of experimental shortcomings is that bad policy
cannot easily be disproved, nor can sound policy be validated.
Most guiding policy bears its fruit often with a lagged time effect, only
to breed enormous controversy. The disastrous 1972 Nixon Wage Price
Freeze restricted supply, resulting in price inflation from shortages, but
only later in the following years. Carter was inappropriately blamed for
much of that inflation, which was compounded by OPEC’s quadrupling of oil
prices. Carter was labeled as the worst economic steward our nation had
seen since Hoover. That shameful title belongs around Richard Nixon’s
neck. The prudent trimming of federal government bureaucracy by George
Bush Sr. in 1989-1992 cleared the path for his successor, Bill Clinton.
Bush was voted out of office during the recession triggered by the Gulf
War, while Clinton was given a firm foundation for economic expansion.
The hyper-extension of credit during the Clinton years, amplified by
Greenspan’s insistence to underwrite all economic and financial accidents
with unprecedented monetary liquidity, created the bubble in stocks up to
the year 2000. Many unenlightened people, including members of the press
& media, incorrectly place some blame for its natural bust on George W.
Bush. Federal Reserve tightening aided the termination of the speculative
mania. The lag effect is truly remarkable from a political viewpoint,
whereby actions bring about responses in 1-3 years. Each president is
railed or credited for the decisions made by his predecessor. An entire
article would be necessary to treat this topic adequately.
ILLITERACY AMONG THE PUBLIC:
Vast illiteracy exists among the voting public, business sector, and
investment community. Until recent years, Economics had not been taught
at the high school level, and now only in the best schools. The topics
are not easily understood, and worse, considered either too boring or so
abstract as to be useless. Most people I speak with personally harbor no
illusions about any resident capability whatsoever in the Economics field.
Their quantitative training has been surpassed by mounting financial
complexity. The public’s minimal comprehension forces them in their
ignorance to trust officials and leaders to make right decisions. Those
who offer dissent are led into opposing political camps, where depth of
understanding may be no more enlightened nor less beholden to the past.
Economists should afford competent leadership over the unskilled public,
providing stewardship over public policy with a minimum of political
jockeying, and a maximum of competent analysis. I believe economists fail
miserably, albeit in a tough environment.
Many advanced degree programs in the sciences can be conferred with zero
formal training in Economics. MBA programs do contain some training, but
most graduates only have a basic exposure. Yet these well-funded seedbeds
produce our corporate leaders. Worse, Law School yields most legislative
leaders in Congress and State Houses. I am unaware of any Economics
courses taught in programs leading to jurisprudence degrees. States do
often draw their governors from the ranks of business, to their credit.
With roots in Wall Street, is New Jersey Senator Corzine impartial in
dealing with brokerage house corruption?
But the problem is even more frightening. Over the years I have
personally come into contact with at least a dozen colleagues with M.S. or
Ph.D. degrees in Economics. Few have continued within their native field,
as most migrated to related work like sales forecasting or marketing
research or business development. In a conversation last summer, a
certain VP of a firm had a conversation with me regarding the USDollar. I
had reminded him of my spring expectation that our currency would suffer
devaluation. He was intrigued by the description of Gresham’s Law,
whereby bad money displaces good money. He holds a B.S. in Economics, and
stated to me that the cheaper dollar will make our vast foreign imports
less expensive, thus aiding our economy. The opposite is true, as I
pointed out, laying the groundwork for renewed price inflation. He shook
his head, “this stuff aint easy.” No, Economics is not easy.
“The Death of Literacy” by Jim Puplava (March 2002)
www.financialsense.com/stormwatch/oldupdates/2002/0301.htm
ACADEMIA’S IVORY TOWER:
Any serious discussion of Economics must begin with academia, since it
produces tomorrow’s analysts and is tapped by politicians for public
service. The university Economics community has unfortunately become the
province of the abstruse, arcane, and irrelevant during the last few
decades. Much research tends to be inordinately focused, far too advanced
in theory, or remote in relevance. Certainly, many bright and dedicated
people make worthwhile contributions. But where has the leadership been
during one tumultuous decade after another since the 1970’s? It has been
notably absent. Instead, economists have become apologists and
ideologues, teaching no more than Keynesian principles which support the
system.
I identify three serious problems with academia, crowned by lack of Nobel
recognition. The nature of their Economics research seems more than a bit
abstruse and of questionable relevance, cited above. The connections and
associations with political groups have been natural, to be expected since
executive appointments are oftentimes made from academia. But
associations have led to camps such as the Harvard School of thought,
known for its hardcore liberal beliefs. Harvard has become an apologist,
defending the USDollar as the reserve asset to enjoy world exporter
recycling, and favoring generous applications of federally created credit,
from which to satisfy socialist appetites. Their leading figures are Paul
Samuelson and Milton Friedman, who support the Keynesian viewpoint
favoring constant government participation in the private sector.
Proliferation of debt and monetary inflation has required indoctrination
in order to sustain public support and spending patterns. Any aspiring
professor in the NorthEast whose belief structure fails to conform to the
dominant mainstream will simply not be considered for either a post or a
chair. Economist academia has become heavily politicized.
Lastly, the Economics curriculum is incomplete; course offerings bypass
almost both governing cycles and waves of mass behavior. I refer to the
Kondratieff Cycle, which stipulates super-cycles lasting roughly one human
lifetime. Past K-Winters have climaxed following the 1870 railroad
(over)expansion and following the 1920 car/radio (over)expansion, killing
the monetary standard in each case. What lies ahead for the USDollar
standard as we contend with the latest K-Winter? The world now struggles
with the resolution of 1990’s information technology (over)expansion.
Note the common theme of overbuilt transportation behind each speculative
peak. Behind each climax was a credit explosion, followed by a
contraction. I know of no graduate programs covering this super-cycle
topic. Also, I refer to the Elliott Wave theory, which provides
surprisingly effective models for both the occurrence and extent of climax
tops in the stock markets worldwide. I know of no graduate programs
covering this topic. Universities typically are a hotbed of intellectual
curiosity and challenge to the system. But with Economics, the structural
status quo seems to be uncontested. It is deeply entrenched.
A few of my pet peeves are worthy of mention. Instead of leading the
Federal Reserve with guidance and analysis, some in academia see fit to
form a Shadow Open Market Committee to handicap and second guess monetary
policy. Why not question such central planning instead of watchdogging
it? If the Fed has run amok, who but Economists are to lead it away from
reckless ways? The trend with each passing decade is for more federal
control and less free market. In fact, efforts should be directed at
simplifying their formal methods. A special name is given to their brand
of arcane analysis; they call it Econometrics. Their extensions to
well-grounded established statistical theory include such intractable
methods as “structural equations”, which offer unstable solutions! Many
certainly fine men and women labor in academia as Economists. Far too few
are competent statisticians. Their soft methods are laced with politics,
while they hard methods are unstable. The shortcomings of their
analytics are outlined in greater detail in what follows.
Nobel prizes in Economics have steadily been awarded in recent years. One
might find it curious that the award winners hail from related fields such
as mathematics and psychology. Princeton Psychology professor Daniel
Kahneman shared a recent Economics Nobel prize for extending the work of
Amos Tversky on the asymmetric bias of spending patterns following
principal loss. Over ten years ago, Herbert Simon (from my alma mater
Carnegie Mellon University) won an Economics Nobel prize for his
mathematical model of interactive brain function. The recent hit movie “A
Beautiful Mind” featured the life of John Nash, who received an Economics
Nobel prize as a mathematician advancing Adam Smith’s ideas on maximizing
collective utility.
The prizes for Economist researchers are loudly absent. Are they largely
political promoters and frontmen? I believe worse. I believe their
community has succumbed to the temptation of promoting political party
agendas, with its principal spokesmen soaking up adulation and enjoying
icon status. Institutional economists have fast become a Political
Priesthood, which has sold out solid defensible analysis methodology in
favor of adaptive malleable political ideology. Their central function is
in the promotion and justification of federal budgets, support of
brokerage house strategic calls, and upholding the imperial dollar
currency.
“The Kondratieff Winter” an interview of Ian Gordon (July 2002)
www.financialsense.com/transcriptions/Gordon.htm
“Cycles” by Wally Bently (April 2002)
www.gold-eagle.com/editorials_02/wallybently040502.html
COUNTS WITHIN INDICTMENT:
1) Ignorance and Revision of History
Ignorance of super-cycle phenomenon of credit expansion, since 1776
Projected panic phase sometime within 1995-2005
Ignorance of Elliott Wave explaining mass behavior
Rewrite historical account of Great Depression, ascribing the cause to
insufficient monetary liquidity, when actual collapse came in response
to excessive credit expansion
Inability to point out parallels early between 1930 and 2002
Silence in pointing out parallels with 1970 decade and 2000 decade
In London Gold Pool defense of #32 price, present #320 defense
Failure to properly ascribe blame or credit to previous president policy
Overlook lagged effect, preferring political blaming game
Result: Concealed and eliminated learning opportunities
“Revisionist View of the Great Depression” by Antal Fekete (March 2002)
www.gold-eagle.com/editorials_02/fekete030602.html
www.gold-eagle.com/editorials_02/fekete031302.html
2) Intellectual Support of an Intervention Policy
Federal Reserve exists from Congressional forfeiture of its
constitutional responsibility, exposing it to the power influence of
large private bankers and political leaders alike
Excessive tightening by Fed has led to recessions, while excessive
easing by Fed has led to asset bubbles
Fed Governors do not respect the credit market equilibrium forces
Explicit and implicit support of (not a single peep of objection) the
Federal Reserve issuing credit for numerous accidents from 1988 to 2001
Nixon’s Wage Price Freeze in 1972 created horrendous supply imbalances
John Meriwether’s LTCM failure was not permitted to resolve itself,
allowing him to continue operating as a hedge fund manager
Greenspan has taken interventionist policy to unprecedented heights
in circumventing recessions within the business cycle
in underwriting international financial accidents
in a disastrous monetary expansion attempt to repeal the super-cycle
debt cleansing process
in purchasing S&P, TBond futures via Exchange Stabilization Fund
Nonexistent warnings of new bubble formation within credit markets
Huge implications for Mortgage Backed Securities and Real Estate
Tragic implications in consumer debt, as bankruptcies soar
Securitized debts are saturating bond markets, deceiving unsuspecting
investors on inherent risk
Public cheerleading of stock valuations
Economists heartily endorsed New Economy proclamations
Greenspan defended stock valuations, citing fast information flow and
greater efficiency with supply chains and Just-in-Time inventory
Greenspan continues to pronounce Productivity as both the economy’s
and the stock market’s saving achievement (subject of future article)
Fed Model (S&P) assumes Wall Street skewed earnings projections
Result: Increasing volatility with each successive cycle, with no
attempt to explain the rising instability and its link to intervention
“Capitalism’s Paradox, the Fed” by Ed Bugos (March 2002)
www.gold-eagle.com/gold_digest_02/bugos032502.html
3) Disputable Assumptions used as Policy Foundation
Assumptions are dictated with little evidence of veracity, and without
debate to unsuspecting masses and Congressional leaders
Examples from the last 15 years:
GDP growth rate above a certain level produces price inflation
§ Monetary and credit expansion causes price inflation
§ Greater growth results in supply rising to meet rising demand
Jobless rate below a certain level produces labor cost inflation
§ Disregards Mexican labor pool following NAFTA passage
Increased monetary and credit expansion can alleviate problems owing
to hyper-expansion in credit and its ensuing collapse
§ A widely accepted absurdity with political appeal
§ Forestalls balance sheet cleansing, which is mandatory for the
economic recovery itself
Result: Confuses debate behind decision making process
4) Myopic Statistical Analysis Methods
Confuse entirely different background economic conditions when citing
past effects from previous decades
Response to stimulus from current bear market cannot be expected to
invoke the same response as from past recent bull market
Justify current stock valuations by comparing against past bull
correction levels
Conclude household debt levels are not a problem, since they were not
in the past
· Naively form aggregate perspectives within analysis
Consumer spending forecasts totally avoid household debt
Expect growth in GDP from low inventory levels alone
Expect US exports to rise after dollar devaluation
§ Foreign economies will be much weaker
§ Our mfr’ed products contain 35-40% imported components
Defend tax rate increases for purpose of raising tax revenue, decry
tax rate cuts as resulting in reduced tax revenue
§ Almost all historical evidence is to the contrary
· Make assumptions, calling them facts
Expect capex to rise from merely lower interest rates
Label high productivity as the driver for economic recovery
· Result: Really bad analysis
5) Incomplete Statistical Analysis System
· Ignore major drivers and dynamics of change
USDollar devaluation is a process trend, unleashing profound effects
in a vicious circle, feeding upon itself
Exporting nations continually seek to debase their currencies
Exhaustion of cars and housing demand after lowcost financing
Social Security Trust Fund is tragically underfunded
Rising debt levels of households and corporations
§ Fully 75% of GDP is sapped by debt service !!!
Falling interest rates drove the 1990 decade of prosperity
§ Not so much rising (fictitious, distorted) productivity
· Underestimate key financial market effects on the economy
End to lowcost mortgage refinancing will stall spending
Reversal of rate swaps will smother corporate earnings
IPO stock issuances funded capex, now at standstill
Stock buybacks bleed R&D funding, product development
Pension funding will sabotage capex, R&D, other vital operations
Minefield of bank derivatives threatens overnight annihilation
Heightened leverage from low interest rates, e.g. real estate
Asymmetric wealth loss effect indicates strong pullback in spending
Renewed speculation in commodities with new lowcost money
Upcoming federal monetization of debts will present inflation risk
· Result: Really bad forecasts
6) Legislative Divisions to Promote Political Agendas
· Keynesians align with liberal political camps
Economic tinkering and interference is the hallmark of stimulus
Defend highly destructive price controls, costly social safety nets
The end result might be proliferation of bureaucracy and socialism, as
well as enormous current imbalances
· Laissez-Faire advocates align with conservative political camps
Constant battle to reverse disruptive taxation and other obstacles
The wealthy class fare much better in surviving the Obstacle Course
Economists have lapsed into the role as hired guns within opposing camps They justify peculiar assumptions within annual budgets
Federal budget projections are laughable for future years
§ Assumptions and models are often unfounded and farcical
· Consequence is increasing amplitude in expansion and recession
business cycles, and reckless counsel to our leadership
Rep Bernie Sanders accused Greenspan of presiding over the largest
transfer of wealth in modern history, from middle class to rich
Where exactly is the scholarship and adept statistical analysis?
· Result: Constant political squabbling fills newspapers
7) Institutional Conflict of Interest
· Major role now in defense of the presidential administration
position
Serve as “priests” spouting dogma and ideology
Indoctrinate the masses with dubious new system rules
· Role in defense of brokerage house strategic equity analysis
Almost never expect a recession or a bear market in stocks
Corporations fund monetary academics with endowed chairs, research
grants, consulting deals, honorariums, and prizes
Producing a future expectation based upon rational and logic methods?
Or a team player in defending a business?
Or working for a paycheck, easily led to a justification?
· Result: NY Attorney General Spitzer negotiates research
independence
8) Distortion in Economic Reporting
· Economic data reports have come under severe scrutiny and
suspicion
Many aggregate measures are inconsistent with the pool of individual
leading company figures
Some argue that Enron methods pollute federal accounting
· Seasonal adjustment carries the potential for grand distortions
Seasonal adjustment thrown into turmoil from Y2K expenditures,
disrupting any semblance of stable seasonal basis determination
e.g. in statistics such as GDP growth, retail spending, consumer
durables, inventories, income, jobless applications, housing, etc.
· Backward revisions are unfavorable in at least 75% of cases
Pervasively unfavorable direction indicate blatant bias
· Quality adjustments distort productivity rate to the extreme!
Speed of processors, storage access speed, internet bandwidth
§ Horrendous distortion exaggerates actual spending and work
Principal beneficiary of productivity gains has been consumers
§ Deceptive tactic to justify historically high stock valuations
· Sampling methods are questionable for jobless rate
Anyone working minimal hours is deemed as “employed”
Finite duration of unemployment insurance for those laid off
400,000 new farm jobs kept October unemployment rate under 6.0%
· Result: Life signs of the economy are not a reflection of
reality
“Statistical Revisionism and Wizardry” by Michael Hodges (updated June
2002)
http://mwhodges.home.att.net/statistic-wizardry.htm#top
9) Pursuit of Public Adulation by Fed Chairman (Pied Piper)
Public mandate and adulation triumph over sound independent policy
Management of banking system or of folk hero role?
Knighthood dub could mimic Sports Illustrated cover curse
Now actively endorses shift from stock to bond bubble
Tried to kill the 30-yr Treasury Bond, to force longterm rates down
Actively urges citizens to refinance homes and perpetuate spending
Gradual inducement to gamble with entire life savings and pension funds
Former governor Angell applauds discouragement from savings, spurring
additional risk-taking, in response to Nov2002 rate cut
Wreckage of pension funds leads to temptation to take greater risk
After declaring “Irrational Exuberance”, he yielded to public pressure
Easy money policy satisfied citizens, producing asset bubble
Early year research argued forcefully the benefits of gold-backed dollar Predicted demise of debt-backed currency, verified in recent brief
conversation with Congressman Ron Paul
Spoke eagerly at chance to override K-Winter breakdown
§ Believes extreme monetary expansion can prevail
§ Continued credit extension fails to cleanse balance sheets
Greenspan might act as “Atlas Shrugged” by his hero Ayn Rand
§ Central character resignedly contributed to systemic destruction
Extremist procedures passed off as economic and banking policy!!!
Result: Debt structured against false asset values, colossal losses to
investors and pension funds, leaving the entire economy at risk
“The Economic Consequences of Mr. Greenspan” by Antal Fekete (Dec 2001)
www.gold-eagle.com/editorials_01/fekete120701pv.html
“The Worst in History: 1929-30 vs 1999-2000” by Kurt Richebacher (May
2000)
www.gold-eagle.com/editorials_00/richebacher051000.html
10) Collusion with Corrupt Financial Power Elite
Economists act as sales agents for bankers, brokerages, politicians
Competence “sold out” for shared power, influence, celebrity status
Promotion role intuitively colludes with press/media, finance, and
national leadership toward instilling acceptance, obedience to Ruling
Class
Fortify the “status quo” in the power structure
Promotion role mollifies the underclass, justifying a socialist safety
net
Faulty debt-driven system appeals most to the Financial Elite
Fiscal & Monetary responsibility would limit access to money
Defend heavily invested system of banking and currency
The wealthy (not the poor) can borrow large sums of money
Result: Gulf between rich and poor has widened
11) Deceptive Indoctrination of Economic Definitions
Redefine important terms and concepts for a debt-based economy
Apparent full cooperation from the press & media, mute opposition
Exploits ignorance and illiteracy among the public
Conscious attempt to abuse “framing” -- psychological technique
Redefined (framed) terms legitimize the Debt-based Economy
Legal tender, now money
Credit access, now wealth
Monetary inflation, now Fed liquidity
Deflation, now poor pricing power
Foreign dependence, now recycled trade gap
Indebted currency, now dollar reserve
Rising unemployment, now increased productivity
General market risk, now volatility
Stock investment, now channeled savings
Mortgage investment, now hard real estate asset
Accounting fraud, now financial engineering
Derivatives, now off-loaded risk
Cutting interest income, now reducing interest expense
REFI consumption bubble, now managing home equity
Herbert Hoover, now Sir Alan Greenspan
Result: The public has little fear of rising indebtedness
12) Benign Negligence during Pillage of National Gold Treasure
Tacit approval as the US Gold treasure was sold in order to subsidize
Treasury Bonds during the entire 1990 decade
Both yen carry trade and gold carry trade bolstered US economy
Was carry trade a primary impetus behind the previous expansion?
Was carry trade a primary thrust behind the dollar strength?
Resolution of extensive carry trades now threatens USDollar
USDollar decline now entering into a vicious circle
Cooperation enlisted from European Central Bank
Washington Agreement represents end to the gold plunder
Private bankers and gold miners serve as willing agents
§ Commercial short positions equate to over 3 years production
§ Miner forward sales go beyond economic purposes
China quietly shows evidence of building Central Bank gold reserves
Islamic nations embarking on new Gold Dinar currency
Result: Enduring recession from USDollar crisis, rising Asian strength
FRIENDS OF THE COURT:
The venerable John K. Galbraith stands as the dominant elder statesman for
the dismal science. He provides a refreshingly candid perspective toward
our nation’s economists and their efforts. It is not flattering. In his
1975 book entitled Money: Whence it came, where it went, he wrote: “The
study of money, above all other fields in economics, is one in which
complexity is used to disguise truth or to evade truth, not to reveal it.”
Of those who practice this craft, he claims…
In the status hierarchy of my profession, the Wall Street economist holds
a strangely prominent role. Typically, though not always, he lacks
academic standing, analytical achievement, or significant publication.
Research is foreign to him; independent thought unknown.
“Incurable Optimists: Wall Street economists don’t have recession in
their vocabulary” by Galbraith (December 2001)
www.prospect.org/webfeatures/2001/12/galbraith-j-12-10.html
I offer several friends of the court, beginning with Stephen Roach of
Morgan Stanley, and Jim Grant of the Grant Interest Rate Observer. Each
is tremendously talented, verified by the visceral and hostile objections,
disputes, and animosity generated from the financial community. I am
surprised that Roach’s employment is secure at this Wall Street firm,
since his consistently correct views and forecasts over the past three
years must have been detrimental to their trading and investment banking
business. Grant’s independence renders him a constant thorn in the sides
of both the Fed Chairmen and Administration Council of Economic Advisors.
Bush’s current Economic Council is perhaps the most inept in recent
memory. Obtaining the work of Jim Grant is much more difficult, and
expensive. These two economists have no political agenda, little
affiliation with corporate interests, and thus are considered maverick
outsiders. Some regard them as instigator gadflies, if not antagonists,
especially Grant. He is harshly critical of Chairman Greenspan. As far
back as March 2000, in his monthly publication he criticized claims of
either a New Economy or vastly increased productivity. He debunked
“hedonic adjustments” when he wrote…
The reported boom in manufacturing efficiency in the last half of 1999 was
the result of not one, but two misapprehensions, relate Medoff and
Harless. Not only did the government statistics exaggerate the output of
the computer industry over those six Y2K-obsessed months (for reasons
having to do with the way in which computer prices are calculated). They
also grossly underestimated the number of hours worked to achieve those
results. It was this twin error that, in no small part, enlarged the
legend of the productivity boom and uncorked the newest bottle of
speculative moonshine. Rarely has a botched calculation delighted and
enriched so many guileless people. - Jim Grant (March 2000)
This summer after the asset bubble disclaimer speech made by Chairman
Greenpan at the Jackson Hole Conference, he had this to say.
He [Greenspan] was a very poor central bank chairman. He was passive in
the face of what will go down as a very destructive bubble… Don’t put too
much stock in this bureaucracy called the Fed… When I am asked what I
would do if I were the Fed Chairman, my invariable answer is,’Resign’.
- Jim Grant (Aug 2002)
Although not economists, John Mauldin of Millennium Wave and Bill Gross of
PIMCO, display uncanny skill in analyzing and interpreting many aspects of
the economy as it relates to the financial industry (economy, stocks,
bonds, currencies). Besides the aforementioned, I have not observed any
prominent economists with a track record rivaling theirs. Several show
insights, such as Kasriel of Northern Trust, Wyss of Standard & Poor, Sohn
of Wells Fargo, and Krugman of The New York Times. Kasriel has been
critical of Humphrey Hawkins testimony before Congress, where discussions
recently pertained to everything but monetary policy. He places much
responsibility for creating the stock bubble at the Fed’s doorstep.
The Fed is a price fixer; it fixes the price of short-term credit. If
there is an increase in demand for credit, interest rates want to rise.
But because the Fed is fixing the price of credit to keep rates from
rising, it has to create more reserves or allow banks to create more
money, and that is what leads to bubbles. - Paul Kasriel (Aug 2002)
Various brokerage economists like Bernstein and Sullivan offer sound
opinions, but in time their optimistic outlook dissolves to make visible
clear vested interest. There is nothing like a bear market to winnow out
the vested interests. A brokerage house economist who remains negative
about the economic recovery might be driving a taxicab in the next
quarter.
I hold Roach in ultimate high regard for independence, competence, and
integrity. A sample of Roach’s work follows. His November 7th essay
offers a critique of the recent 50-bpt Fed rate cut two weeks ago, hardly
the stuff to earn a thank you note from anyone but an investor.
And yet the Fed is trying to persuade us that it has now done enough to
arrest this deflationary dynamic. Of course, that is the same argument
that has been made repeatedly since this monetary easing cycle began now
some 525 bpt ago back in early 2001. The place where I always get stuck in
this argument is on the issue of traction -- which sectors of the US
economy can now be expected to respond to the Fed’s monetary stimulus.
There are three obvious candidates -- the interest-rate-sensitive sectors
of consumer durables, homebuilding activity, and business capital
spending. In my opinion, the response of each of these sectors to Fed
easing is likely to prove most disappointing. Here’s why.
Normally, at this stage in a business cycle, there is a good deal of
pent-up demand for items like cars and homes; as such, lower interest
rates typically are quite effective in unleashing that demand and spurring
vigorous recovery. That’s unlikely to be the case in the current cycle.
Demand in these two sectors never fell in the recession of 2001 and they
have remained resilient in the subsequent recovery. That means there is no
pent-up demand that can now be unleashed by Fed easing. Just ask Detroit,
where car buyers are now suffering from zero-interest-rate fatigue. The
same is true of capital spending -- a sector that remains constrained by
the twin pressures of the capacity overhang of the late 1990s and the
ongoing imperatives of corporate cost cutting. In a deflationary climate,
why would businesses compound their lack of pricing leverage by adding to
aggregate supply? Fed easing is unlikely to change the capex calculus in
the current climate.
- archive of Stephen Roach editorials:
www.morganstanley.com/GEFdata/digests/digests.html
A maverick with keen insight is Jim Puplava of Financial Sense Online.
Like Mauldin, he is a fund manager. By the spring of 2001, Puplava
outlined the pathogenesis of a Perfect Storm Scenario. He carefully notes
how debt collapse keeps overcapacity high and liquidation continuing, thus
depleted pricing power and creating pockets of deflation. He carefully
warns that government regulation and environmental obstacles inhibit
commodity supply of necessities, while derivatives hold geared down prices
artificially, all within a cash system. As the overvalued USDollar
adjusts downward in correction, momentum should gain as these jetstream
FOREX winds collide with the low-pressure product zone and the
high-pressure material zone. The result could produce a rare Perfect
Storm. His periodic updates are fortified with arguments and stern
warnings, as the storm slowly develops and feeds upon itself. He
maintains that government intervention actions, although implored by the
public and politicians, only serve to increase the intensity of the
low-high pressure storm gradient, and to delay the storm. The primary
beneficiary of the storm will be commodities, given the huge overhang and
crushing debt load in the finished product arena. As newly extended
credit (margin money) seeks the best investment opportunity, commodities
will offer the most viable “path of least resistance.”
Puplava Perfect Storm Series:
www.financialsense.com/series2/perspectives2.htm
Storm Series Update Archive:
www.financialsense.com/stormwatch/oldupdates/main.htm
I would be remiss if not to mention Ravi Batra, an Economics professor
from Southern Methodist University in Texas. Years ago his extraordinary
predictions foresaw the fall of the Shah of Iran, the collapse of the
Soviet Union, and the gradual demise of the USDollar from its position of
supremacy. He forecasts continued deflationary stress for the US economy,
leading potentially to a inflationary depression as our currency
experiences a crisis in devaluation and debts suffer writedowns in
default. His work is founded upon the premise that the United States
production and spending levels chronically outpace income growth. Each
passing month sees consumer spending outstrip personal income, which
raises few alarms. The result is a crescendo of excess capacity rolling
out excess supply, enabled by plentiful credit, seen now! Ensuing balance
sheet repair leads to recession, which can easily cause a depression as
our overvalued currency corrects. Our omnipresent debt levels are just
too great. Enormous debt and depleted collateral implicitly back the
USdollar currency. Conditions show the way to rising prices and interest
rates.
Crash of the Millennium, by Ravi Batra, Harmony Books 1999
CONCLUSION:
Economists have failed. I mince no words. No topic or concept rings more
loudly as “inflation” for its twisted policy and even more twisted
understanding, owing in part to the propaganda for public acceptance of a
twisted definition. I sometimes think that economists believe that laws
of gravity could be repealed if only they could blow enough of their
arrogant hot air under objects containing mass. Their interpretations and
dealings with “deflation” should offer a true parallel in twisted thought
and policy. In fact, it has already begun.
“Inflation” is defined as an expansion of the monetary base, i.e. the
supply of money from either the authorized printing of dollars or the bank
extension of credit, PERIOD. Economists cannot define it. They cannot
measure it. They don’t know how to fight it. They are unaware of the
price our economy pays in overcoming it, in the manner they perceive it.
How are rock-bottom interest rates and evermore Fed liquidity (aka
monetary inflation) supposed to cure an economy suffering from
over-expansion, excess capacity, over-production, and extreme indebtedness
arising from excessive extension of credit??? Try giving Jack Daniels to
a drunk in detox! Try giving a nuclear reactor core field trip to a
cancer victim!
Ned Schmidt cites a better price inflation measure in the Median CPI,
developed by the Cleveland Fed. The Median CPI tends to behave more
stably, with fewer false moves, and more reliable measurements. Steve
Saville offers the ECRI’s Future Inflation Gauge, which portends
short-term interest rates. It acts like a leading indicator for the Fed
Funds Rate. No, the Naive CPI represents a governmental attempt to
minimize COLA (cost of living adjustments) to federal pensions, and to
suppress reported price inflation. It ignores costs of property tax,
town/city usage fees, insurance, college tuition, and much more.
Economists prefer to define inflation in terms of what “real inflation”
causes, i.e. price increases. Like calling a broken jaw “a roundhouse
punch”, or calling a broken back “a ladder fall”, or calling a car crash
“a wreckless driving.” If you inflate, you plant the seeds of eventual
price rises. We have suffered such pervasive chronic abuse of the
monetary inflation mechanism, that the risk might materialize for
witnessing both a deep recession and price inflation. The recession could
come from widespread liquidation and consequent lost jobs. The price
inflation could come from futile continued monetary expansion while
battling reduction in money supply and suffering deflation in multiple
sectors. Current imbalances have never been this great in modern recorded
history. The Fed may soon find itself stuck in a Japan-like Liquidity
Trap, where continued money printing is useless in treating debt-ridden
balance sheets. Such is a cage where economist ineptitude is laid bare
for all to see.
I will close this long indictment with a contrast of the absurd against
the wise, Milton Friedman from the Keynesian School versus Ludwig von
Mises from the Austrian School. Frank Shostak of Man Financial is a harsh
critic of the clowns who are mismanaging our economy. He is deep, and
speaks with very stern tone. He contrasts these two men’s opinions.
Friedman lectures that if price inflation is anticipated, then it can be
averted by an offsetting infusion of monetary injections. This alchemist
somehow believes matter can be neutralized by anti-matter? Unexpected
price inflation, he claims, leads to a misallocation of resources and thus
weakens the economy. He regards money supply as a tool that can stabilize
price rises, and thereby promote real economic growth. Wow! So wealth
can be printed, or better yet produced as electronic entries on computers?
Now that is productivity! Perhaps Friedman advocates equitable drowning
by rising debt levels in balanced fashion across business sectors and
households?
Shostak quotes Murray Rothbard from his famous book America’s Great
Depression when he wrote, “The fact that general prices were more or less
stable during the 1920’s told most economists that there was no
inflationary threat, and therefore the events of the Great Depression
caught them completely unaware.” Shostak goes on to say the inflation
issue should be viewed in simpler terms. When more money circulates to
chase a given level of goods and services, prices will rise. When credit
is extended to create inflated asset prices, then prices will fall as debt
is defaulted and products are liquidated. So abuse of monetary growth can
lead to BOTH inflation and deflation!!!
Von Mises explains the futility of the Federal Reserve’s mandate in his
essay “Inflation: An Unworkable Fiscal Policy.”
Inflation, as this term was always used everywhere and especially in this
country, means increasing the quantity of money and bank notes in
circulation and the quantity of bank deposits subject to check. But people
today use the term ‘inflation’ to refer to the phenomenon that is an
inevitable consequence of inflation, that is the tendency of all prices
and wage rates to rise. The result of this deplorable confusion is that
there is no term left to signify the cause of this rise in prices and
wages. There is no longer any word available to signify the phenomenon
that has been, up to now, called inflation. . . . As you cannot talk about
something that has no name, you cannot fight it. Those who pretend to
fight inflation are in fact only fighting what is the inevitable
consequence of inflation, rising prices. Their ventures are doomed to
failure because they do not attack the root of the evil. They try to keep
prices low while firmly committed to a policy of increasing the quantity
of money that must necessarily make them soar. As long as this
terminological confusion is not entirely wiped out, there cannot be any
question of stopping inflation.
- Ludwig von Mises
“Defining Inflation” by Frank Shostak (March 2002)
www.gold-eagle.com/editorials_02/shostak031202.html
“Housing Bust: Median CPI versus Naïve CPI” by Ned Schmidt (Aug 2002)
www.321gold.com/editorials/schmidt/schmidt080202.html
“The Inflation Problem: Future Inflation Gauge” by Steve Saville (Sept
2002)
www.321gold.com/editorials/saville/saville092002.html
Consider the alternative and controversial Austrian School of Economics,
dismissed by the great majority as impractical and infeasible despite its
simplicity. Their primary tenets constitute central bank management of a
currency backed by hard assets such as gold, and strict limitations placed
upon fractional banking lending practices. Obviously, our swelling
socialist structures, and freedoms to extend credit (even when unwise)
collide with such tenets. The von Mises community serves as principal
advocate for the Austrian School of Economics, with Kurt Richebacher their
chief living spokesman. How many graduates in advanced Economics programs
claim allegiance, let alone awareness, to this School of thought?
“What is Austrian Economics?” (November 2002)
www.mises.org/austrian.asp
Former Fed Chairman Paul Volcker once said that it was the job of the
Central Bankers worldwide to prove von Mises wrong. They have not done
so. He warned: “The truly unique power of a central bank, after all, is
the power to create money, and ultimately the power to create is the power
to destroy.” Economists failed to warn the coming of the Great Depression
and its destruction. They failed again to prevent or warn the coming of
the current economic malaise, whose outcome is uncertain but whose
destruction is unmistakable. Now we find two-thirds of sectors suffering
months of price deflation, despite the denial of economists. As they next
wage battle against deflation, their incompetence, deception, and
collusion will next be seen from the opposite side of the pricing bench.
Economists cannot define “deflation.” They don’t know where it came from.
They don’t know how to fight it. In this environment, their prescribed
low interest rates are slowing the economy, not stimulating it. Twice as
much interest income is received, compared to interest cost paid out. So
lower rates beget even lower rates. Their new weapon against deflation
has been billed as “monetization.” They unwittingly are setting out to
feed the low-high pressure storm gradient described by Puplava. They will
purchase federal debt, agency debt, major bank debt, all with dollars
created from thin air, adding to dollar supply. The resulting effect on
the currency markets is exactly what is required to accelerate the Perfect
Storm. Dissenters today are mere pilgrims in an unholy land.
The cabal of Economists is fast becoming recognized as an EDEN OF FOOLS.
Jim Willie CB is a pseudonym used since 1998 on Silicon Investor. Jim
works as a statistical analyst for a private consulting firm engaged in
marketing research. He would much rather be employed in a more productive
position, writing about the world financial markets and economies.
Please! Help! Visit his free fledgling website to read other articles
and material, as well as to enjoy light-hearted banter, under the name:
“www.goldenjackass.com"
-- Posted Saturday, 22 February 2003 | Digg This Article
Previous Articles by Jim Willie CB
|
