The Art of Central Banking

I’ve never seen a computer program that will help you get along with your teenage daughter. Show me the science that tells you how to improve the kiss you give your wife. It doesn’t exist. Where is the mathematical formula for a happy marriage? No, it’s not there. It doesn’t exist.

And, so, you have to ask yourself, “What is central banking, anyway?” Is it a science? Or is it more kind of like poetry? Is it an art? Now, take something like judging. Now, that’s something; judging is serious work, but has there been any improvement at all – any improvement, scientific or otherwise – in judging since the time of Solomon? I don’t think so. I don’t think there’s been an improvement in judging, in kissing, or in raising a family. Now, I don’t think there has been any improvement in central banking either. These are things that don’t get better by taking out wrenches and screwdrivers. All you can do is stick with the basics and that usually works. That’s the best you can do.

The idea of economics as a science is totally, totally preposterous, and yet, in order to be a science, you’d have to have a disprovable hypothesis, which you never have. For a science, you have to be able to measure things, and this Federal Reserve policy depends on two numbers, one is the inflation rate and one is the unemployment rate. Well, that sounds scientific, until you start looking at those numbers. You know, the numbers are quantities.

What is the inflation rate? Now, you think that’s just quantity, right? Just add up stuff. Anybody can do that. But it’s not that easy. There are lots of things go on in deciding what to put into that basket, and if you work hard enough, you can get that number anywhere you want it.

And the feds have done a great job at that. They have redone the way they calculate the inflation rate twice in the last 30 years and – guess what? – Each time, they’ve gotten a lower number. How do you like that? What a coincidence.

Right now, we have an inflation rate of about 2 percent. If you did it the way they did it in the ‘90s, you’d have 6 percent. Okay, that’s 4 percent difference, but it’s – you know, it’s three times the rate that we’re working from. And, if you did it the way they did it during the Carter Administration, you’d have an inflation rate of almost 10 percent. That’s five times the number we’re working with.

Now, here’s the question. Each time each of these numbers was done by a group of economists, the brightest and best in the country. Now, which one of these groups was a bunch of dunderheads? One of them was! Two of them were! How come? How are you supposed to know that? Which one is right?

I don’t know, but that’s what you get in a credit-based system. Then, you’re dealing with a lot of little things that you can’t know. It doesn’t work.