Daily Archives: November 24, 2014

They have no other options left.

Sailboat racing is very much like Central Banking’. It is always about choices: starboard or port, right or left, higher or lower (prioritize angle or speed). A sailboat racer must be ambivalent; good reasons impel us to do one thing, but other reasons may compel us to do the other.

Just like Central Bankers, when racing, sometimes you have all the choices available, and some you don’t.  In order to have complete freedom of choice, you have to be in a good position. Unfortunately it is the nature of the game that all sailboat racers have spent more time in the middle of the fleet, than they would care to admit. It could have happened because we were not the fastest boat in our group (one of the problems with handicap racing). Alternatively it could have been a bad choice of the side to sail in the first beat. Or it could well be inadequate sail trim, generating below polar boatspeed. Maybe it was just a bad start or, worse yet, a full OCS (translated: an early start makes you go around the start line again). When various factors accumulate, your choices become limited. When you hit the layline, you have run out of them. Most of the CB’s are sailing their starboard laylines right now.Sailing_Performance

In the economy, the same situations apply. An economic system is much like a sailboat racing environment. It has to deal with structures of essential complexity whose characteristic properties can be exhibited only by DSGE models with large numbers of variables. It is also a system, as Hayek once said, of “organized complexity”. Events are not only determined by the properties of the individual elements that concur, but also on the manner in which the individual elements are connected with each other. Our tactics when racing condition the tactics of the rest. It is not all about the pure physical interaction of boat speed, wind, and currents. Every economic decision has not only objective direct implications on other variables (lagged or not), but game theory implications on the conduct of the other participants as well.

Central Banks are a substantial part of the economic system. They have climbed the ladder of economic relevance all the way up to a regrettable point -they are the only game in town. Their actions condition the reactions of the rest of the economic agents. Furthermore, they also condition the actions of the other Central Banks.

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