11/12/10 London, England – “The most ignorant remarks ever made by a central banker.”
“When I started my economics studies at 16,” wrote Paul A. Samuelson not long before he died last year at aged 93, “Carlyle was right to call economics a ‘dismal science.’ Thanks to modern science and better economic knowledge, this Malthusian curse has been vanquished. Good modern economics make economics the Hopeful Science. At last!”
Lucky professor Samuelson! Like an aparatchik who joined the shades before 1989, he went to his reward with his delusions intact.
This week, the scientists began to have doubts. Like the pope wondering about the resurrection, or the Mormons questioning the veracity of the angel Moroni, the head of the World Bank, Robert Zoellick, shocked the learned world. It’s time to start discussing a gold-backed currency, he said. Maybe the crown of creation of modern economics – its centrally managed money – was not such a good idea after all.
Like Christianity, the dollar only has value as long as people have faith in it. But that is true of almost every trick up the modern economist’s sleeve. If people stop believing, the spell is broken and they’re worthless.
Two years ago, when the financial world was melting down, we were told that the volcano needed to be appeased. Without immediate injection of funds, the whole system would blow up, they said. Where was the science behind that? The financial system melted down countless times in the past. No central bank came to its aid before the 1930s.
Or how about the corollary article of faith: that the public had to rescue the big banks, a tout prix? It was practically a universal constant – like the Golden mean or Brownian motion. When bankers make profits, it is theirs to keep. When they lose money, the losses are moved onto the public. The US bailed out its banks. Britain, Ireland, and Iceland did the same. But where was the evidence that bank failures were so horrible? During America’s Great Depression 9,000 banks failed. And history is full of the wrecks of banks that were “too big to fail.”
A hick Congressman from one of the corn states once proposed to round off pi to 3 to make it easier for schoolchildren to remember. He must have been joking. In the world of science, water boils at 212 degrees Fahrenheit, at sea level, whether you believe or not. Pi is always a long string of digits. The mathematicians can sweat and shake all they want; it doesn’t change. But modern economists take the joke seriously. They think they can command water to run uphill and reset the Periodic Table with fancier china. That’s why they hate gold: they can’t control it. And it reminds them that they imposters, no more effective than witchdoctors or marriage counselors.
As of this writing, it takes more than $1,400 to buy a single ounce of gold – a new record. Why? Isn’t it obvious? People are losing faith. Last week, the US Federal Reserve said it was creating another $600 billion to buy US Treasury debt. That will mean a total of $2.3 trillion added to America’s monetary footings since the Fed began its QE program almost two years ago. This will also mean that Ben Bernanke has added three times as many dollars to America’s core money supply as ALL THE TREASURY SECRETARIES AND FED CHAIRMEN WHO CAME BEFORE HIM PUT TOGETHER.
“Easier financial conditions will promote economic growth,” wrote Mr. Bernanke, in The Washington Post, “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Where is the proof? Where is the controlled test? Where is the peer review? Such an extravagant assertion ought to be accompanied by extravagant evidence. But there is none at all. Throwing virgins into a volcano would be no less scientific. The virgins appeased the gods; that was the theory. Mr. Bernanke has a voodoo theory too. He says all that new money will make people feel richer…and then they will act richer…and then they will be richer!
John Hussman, also an economist with a loyal following of his own, read Mr. Bernanke’s explanation and pronounced judgment: “the most ignorant remarks ever made by a central banker.” The latest $600 billion gamble may or may not increase stock market prices, he says. Even if it does, it is unlikely to produce the “wealth effect” that Ben Bernanke is counting on. People spend and borrow when they think they have permanent wealth. World stock markets have suffered two major shocks in the last ten years…with no net gains for investors. An increase in stock prices now – driven by the Fed’s printing press – is unlikely to create the kind of expectations that lead people to spend money. Especially when they don’t have any.
Which makes us wonder too. If modern economists are scientists, it makes us suspicious of the rest of them. What about the physicists? The molecular biologists? The archeologists? Are they all quacks too?
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Hey Bill, you’re starting to make sense again. Of course all scientists are quacks. A doctor is no better than a drug dealer. I’d be surprised if they read the insert of what they prescribe. Scientists are dangerous to your well being.
With trillion dollar deficits from here to eternity and no effort to refrain from spending, does Bernanke really have a choice? My personal Econostrologist says that monetizing debt may be the lesser of two financial catastrophes.
I’m a former scientist (not economics). We’re not quacks when dealing with what we’re trained at – conducting experiments on a particular microcosm. But get to the big picture, we do tend towards quackiness, defined as ignorance tempered with arrogance.
I’m a scientist, as well. Unlike economists, we deal in testable, repeatable experiments. Our data and conclusions are peer-reviewed, chewed over, and debated before being accepted. We don’t create fiat currencies or issue peremptory decrees that may or may not work!
When the market loses faith in the dollar it will be shown directly through a much higher yield an 10 and 30 year treasury bonds. Not indirectly though Gold prices.
To date the market remains firm in its faith in the dollar. The proof is in today’s 4.29% yield on the 30-year bond.
Apparently real investors are betting real money that a return of 4.29% per year for 30 years will compensate them for locking up their money and for inflation.
Call us when that yield gets to more like 8% and we can talk about a loss of faith in the U.S. dollar.
“Which makes us wonder too. If modern economists are scientists, it makes us suspicious of the rest of them. What about the physicists? The molecular biologists? The archeologists? Are they all quacks too?”
– Yes.
The “real investors” buying the Treasuries would be the Fed.
The ultimate litmus test for quackery: If it looks like a duck, walks like a duck and quacks like a duck, -it’s probably a duck!
As long as you entertaining such foundational questions, lets also turn our critical eye towards two other pillars of modern financial system i) interest and ii) fractional reserve banking. The latter being a relatively modern construct, while the former competes with prostitution for the oldest occupation. But both having far reaching effects which serve to create fake wealth. Or is this too much of a sacred cow for DR readers?
This reminds me of that point in “The Hitch Hikers Guide to The Galaxy” when Deep Thought finally provides the answer to Life, The Universe and Everything.
In the back ground you can hear the philosophers (economists?…) talking.
“IS that it?!!”…. “We are unemployed!”… “We’ll be hung…”
“the head of the World Bank, Robert Zoellick, shocked the learned world. It’s time to start discussing a gold-backed currency.” Show me the proof, science if you will, that gold will fix everything. Or will it be more quack science.
Hi Bill,
Good stuff! Amongst other things I’m a control engineer. A sort of sub-scientist I suppose.
As far as I can ascertain empirically, all the economic Nobel laureates on the planet (apparently inevitably in combination with all the politicians on the planet), haven’t much of a clue about how to control a complex system involving high “leverage” and long time delays, not to mention all those pesky humans involved too.
Maybe there should be a new government regulation to the effect that all the economists and politicians should pass exams in control theory before they’re allowed to twiddle the knobs supposed to control our “dismal economy”?
Jim
Hi Bill,
I follow your blog regularly since the past 1 year.
Your blog is quite informative and makes a lot of sense to me. While I agree with your criticism on the policies taken up by Ben & his team, I would also like to know your views on what is the way out of this mess? Do the governments across the world have any alternatives or all of us are doomed? Cant all the G-20 countries come together and come up with some sort of a plan to clean this mess?
I hope to see your views on the approach that US and other countries need to take that will help US & rest of the world to come out of this mess. It does not matter how remote is the possibility.
Thanks
Surender
@JimHunt:
Too true, Jim. System theory immediately exposes the frauds. Using it to measure the various claims made by modern science reveals that corruption and stupidity are rampant throughout every discipline.
saludos,un simple electricista,que se queda perplejo,y piensa LULA es considerado el mejor presidente del Brasil,a pesar de su poca educacion,esta es la epoca de elegir a politicos de poca educacion y mejores principios morales,primero tendriamos que vacunarlos contra el sindrome de la corrupcion,Pedro
It is a nice article , being a science student I love to read such articles as it unfolds many new truth.