Monthly Archives: November 2015

‘Piecemeal World War III’

Have we, as a global society, gone way past the point of no return? Reading my last post again, just after the Paris counterattack by ISIS, it struck me that maybe I shouldn’t be constantly denigrating the wolves shepherding the human herd. After all, sporadic social upheavals and terrorism, can -and will- get worse. Much worse. Confronted with ISIS, or Nicolas Maduro, I’d rather have Mario Dragui and friends running the show. Recently drone defunct ISIS “John” and co, or any other radical group, might be the herd-backed alternative. Our choices are increasingly limited to picking the lesser evil. Maybe I should back them Goldmanites after all -at least they do not know how to handle a Kalashnikov.

We dissidents might be entering a time where Austrian based economic surgery is no longer an availble option. We tried hard to prevent public, government, and CB endorsing of the actual state of affairs, but nobody really listened. Let me tell you it felt lonely in the Austrian club -for endless years. But resentment is not a constructive emotion, however unfair and shortsighted Goldmanites and affiliates may have been.

That doesn’t mean I have changed my mind regarding global macroeconomic policy, though. I have no doubts that Bernanke, Krugman, Summers et al should be put to jail for their grave neglect, or at least condemned to economic ignominy. The piles of debt and layers of inequality accumulated are daunting. But, no matter how thoughtless and stupid economic policy may have been, the harm is done -and is likely beyond peaceful & orderly repair. As Ghandi used to say, an eye for an eye and we all end up blind (sorry I can’t side with the Jews, or Hollande bombing, on this). With WW III already well started, we have to remain focused on some crucial and urgent achievements.

  • An economic landing as soft as possible, after the long overdue, debt write-downs.
  • An economic system with a strong supply side in order to improve employment, wealth distribution, and mental health of the unemployed and underemployed.
  • An efficient, and fair, distribution of generated wealth.

That’s a hell of a job, in a very short time -in the meantime let’s forget the responsibilities accrued to those implementing the economic policies that took us here in the first place.

I increasingly doubt the patient (our social tissue), would survive surgery if we cease money printing, bring about some modest interest rates, downsize public expenditure, and compel people to read and work. Without reading and working, exponentially growing parts of our population are in for morbid mental obesity (if they are not there already). Economic surgery implies short term pain, for a long term gain -and a payback to our children. These are concepts unlikely to be understood by the mob. So maybe it’s best to just keep printing money, and “nirping” away our savings, for as long as it goes.

For sure all those surgical changes, that imply giving JMK a decent but irreversible funeral (and nothing less than a total cremation will do), cannot be implemented simultaneously. No question we need some time lags, and adequate phasing of the appropriate policy. But even playing our cards deftly, over a couple of years, I doubt we can survive the ensuing social turmoil. We have stretched unfairness and inequality well past the limits. And corruption is now, for all intents and purposes, obvious to everybody. abraham-lincoln-president-the-shepherd-drives-the-wolf-from-the-sheeps-for-which (1)

What finally makes economic surgery an unlikely success, is the fact the world population is more and more a mob of brainless short-sighted residual leftovers from the Homo sapiens species. They would not understand that we need surgery, if we are to clean up the mess, and set up an economic infrastructure that can grow moderate and sustainably -while preventing and uprooting the constant generation of outrageous inequality. Lastly, let’s not forget, if democracy continues to play, they control the votes.

Redistributing wealth will not do the job -as a stable fix. It is not about entitlements or redistribution of incomes. It is about distributing properly from scratch. Redistribution comes at a heavy cost, because it impairs entrepreneurship and personal effort. It will take time for society to understand this. Increased taxation is not the way to go. We have to route value fairly, as it is generated, to the right economic agent. And unfortunately for anybody holding equity, the consequences of doing so, will be severe for after tax free cash flow (explanation below).

The main generators of atrocious inequality are,

  • large, corrupt and inefficient governments -with their elites,
  • large ultra-efficient, but ruthless large caps and multinationals and their boards of directors,
  • Goldmanite politburo controlled CB’s and all those near them that profit from the Cantillon effect.

They are responsible for most of the inequalities that have surged over the last two decades. Definitely, lots of bad news in the pipeline for those groups. Continue reading

I still think the top is in place -or thereabouts.

We got it all wrong.-

I came across some old reads regarding the Taylor rule for the monetary policy imposed rate of interest -the fed funds rate (not to be confused with the Wicksellian, natural rate). As most economists would have done, I immediately engaged in a quick mental check of the implied rate applicable in our actual economic conditions -both for the Euroarea and the US. You can think for yourself, it is pretty straightforward to calculate -if you can trust the published inflation rate, and figure out the output gap with some sense of accuracy (I suggest you better just trust the official liestatistics).


And then, I began to think about its components. It was built for the US, and, as a consequence of the dual mandate, it sports two weighted structural components. The inflation weighting, arbitrarily set at 0.5%, and the output gap coefficient also at 0,5% (in the original formula). Both figures stink of a Solomonic compromise between the two mandates. No scientific backing is to be found for those equal weightings. His guess is as good as mine -or any other.

What’s more, the math also includes an “out of the blue” implicit inflation target at two per cent, and a Wicksellian-estimated long term equilibrium real interest rate of 2%. Take all those subjective factors in, put some faith to play (of the religious kind), and assume they are right. Now, that, and no other, is the run of the mill amount of predefinitions that apply even for a relatively simple (and brilliant) formula. Just imagine what the formula would be like with a DSGE model like math. No matter how good the formula is, the estimated pre-introduced parameters are bound to be wrong. We are following the wrong economic manuals.

Do you really think that any of us can get those parameters consistently right -much less so the mediocre FOMC? Come on! We have to be realistic. Give me the formula and the chance to chair the Fed, and I will provide you with some decent arguments for a Taylor rule rate calculation with a double result. And a spread between the two numbers in hundredths of basis points! They are really playing “God”. And they like it so much… They feel powerful. It’s like pretending to be Superman. Some say power is a great aphrodisiac. Maybe. I have to give it a try someday.

Once you decide that monetary policy plays not only a role, but even allows for a dual mandate, it is all a downhill walk to arrogance. Planetary arrogance. The equation (or its most basic principles), is also applicable for China, Japan, or the Eurozone, provided we can convert it into a somewhat more sophisticated algorithm. Why only two mandates?

The ECB may not have an explicit dual mandate, but de facto, and viciously late, it always goes all the way to “whatever it takes”. At least ever since we lost good old fashioned Jean Claude Trichet. Talk about crappy dual mandates like in the US. You want to be generous and open minded. Dragui and Co feel they have a spherical multipolar mandate to do, whatever it takes, for any end that they feel might be desirable. It gets better yet with Chinese monetary policy. When it comes to the Chinese we really need a half a dozen formulas. Monetary policy, credit growth, child birth policy or fiscal profligacy are all levers to fine tune the economic engine. And I am missing some more. Fine tuning? Or gruesome manipulation?

Maybe Taylor should work on his math and take climate change, social distress, and immigration policy -or any other relevant issues that suit the politburó, as new elements for the formula. He can give them equal weighting (following up on his previous Solomonic strain) or opt otherwise. Maybe he can give climate change an 80% weighting. Or he might even enjoy introducing some ideological factor with a relevant weighting to please the Chinese communist party. Does it matter?

magic moneyConventional wisdom has it that monetary policy really solves it all. It’s just magic. People are beginning to whisper the miraculous result of joint immunotherapy and NIRP in the advanced treatment of cancer metastases. Can you imagine that? Once you do think that monetary policy is a tool for anything other than stabilizing the value of our medium of exchange (money), you are booked into Hotel California. You can never leave. You will need more and more of the drug. And while you are still booked in, why not try to use the hotel drug saloon-spa to bulge investment, lower unemployment, or combat corruption or climate change with it. The whole set up smacks of arrogance and insane reasoning. And yet nobody dares question this axiom.

If you manage money, and you are serious about it, you just have to double-check all the economic conventions constantly. This is a rapidly changing world, and you’d better see risks before others do. On this particular rule, and the implied wisdom underlining it, the validity of the recipe is crucial. Right or wrong, I like to think, and challenge conventional wisdom in key axioms. Some of us are perpetual dissidents in whatever area of science we happen to be involved. Actually, believe me, it is very tiring to question daily what everybody else takes for granted.

US Taylor rule

The chart is a little dated. Taylor rule rate right now is likely below zero again (inflation is down and the output gap is a tad worse)

The Taylor rule is like the ten commandments list. Everybody is wholeheartedly confident that it is the work of a genius. In fact I have nothing but praise for the maths in the formula. My discrepancies go much deeper. Why do we need a formula?

Taylor’s algo has certainly helped provide a coherent explanation for the interest rate levels set by the FOMC since Volcker -up to roughly 2010. Alan and Ben adore it, so I have to be extra-careful about my critique. Right now, it is suggesting no tightening for the USD -that most likely wouldn’t last long because of instantaneous further deterioration of the real economy. To be very honest, I really don’t care. And anyway, as of late they are actually ignoring it. Interest rates have to go up, but not because of Taylor rule numbers, inflation expectations, or taming the cycle. And the best we will get, if we do get it, is a “one and done” job.

The issue is not if this is the applicable formula or we should use any other. It is not about dual or even single mandates. The issue is if monetary (and fiscal) policy guided economic activity is the way to go, or a self-perpetuating delusion. Continue reading