02/18/11 Baltimore, Maryland – The World According to The Daily Reckoning…
First, a quick look at the news…
Dow up 29 points… Gold added $10.
Stocks are up about 100% from their March ’09 lows…
Guess we were wrong. We thought stocks were too dangerous… We’ve been out of them since the late ’90s.
Wait…you say stocks have gone nowhere since the late ’90s? Investors have made nothing.
Well, that makes us feel better about missing this rally.
Hey, what’s this? Oil is up too – it traded at more than $100 a barrel yesterday. And look at the other commodities:
“Wholesale prices hit two year high,” reports The Wall Street Journal.
Looks like everything is a good investment.
If only we had a Wall Street bank! We could borrow from the Fed at zero…and buy anything. Whatever we bought, it would go up. Especially if it were gold.
Is this evidence of a robust, growing economy? Or, is something else going on? We’ll come back to that…
Because today you’re in for a treat…
The World Explained! Or, at least part of it.
Ultimate Secrets Revealed! At Last…how an economy really works.
And as an added bonus – we’ll tell you what government is all about too. But that will have to wait until next week.
How’s that for a build-up? We’ve managed expectations so high they’ll need a parachute to come down.
But why not? Today, we reveal – for the first time ever – why Ben Bernanke is an idiot. And why almost all modern economists are wrong. And why all the trillion-dollar “recovery” schemes won’t work.
And no… We’re not forgetting the bonus. We’ll also tell you why all the chatter about democracy breaking out in the Mideast is just vain heavy breathing…
This is an important edition of The Daily Reckoning…print it out. Share it with your friends. Put it away for safekeeping. And then, in a quiet moment, pull it out…pour yourself a stiff drink…and throw it away.
Let’s get started.
The trouble with modern economists and most people who don’t work at The Daily Reckoning, we’ve said so many times, is that they have the wrong paradigm. The wrong idea. The wrong metaphor.
They think an economy is a kind of machine. They think they can make it work better, or fix it when it is broken, by tinkering with it. That’s why they have a fellow like Ben Bernanke – a techie kind of fellow with an adjustable wrench in his pocket – at the Fed. They think he can turn some valves…and make the juice flow.
‘The economy needs more liquidity,’ says one expert. ‘No, it’s time to raise rates,’ says another. ‘Forget it,’ says a third, ‘the federal government should launch a major infrastructure program.’
Each mechanic thinks he knows which screw to turn. Each has his theory…his idea…and his role to play.
In fact, each is paid to believe what isn’t true. If he admits that he has no idea which knob to turn, who will give him a job? Who will publish his book? Who will invest money in his hedge fund?
Not the government. They want solid mechanics…guys who know how to use a screwdriver. They think their job is to control this machine. At the Fed, for example, there are hundreds of economists paid to maintain the value of the dollar, full employment and (a mission Ben Bernanke has taken on recently) a bull market on Wall Street.
What about a university? Could he get a job there? Well, first, you need to be able to describe the machine even to get into the Ph.D. program. Then, you need to write a thesis about how it works…about how the Fed’s interest rates effect consumer purchasing…or how you can create a complex mathematical formula that predicts capital investment booms in medieval city states. You need to add to the world’s knowledge and understanding of the Great Machine, in other words. You need to give policymakers more and better tools to tinker with. Do it well enough and you may get to be the head of the Princeton economics department. Or, you might even get a Nobel Prize.
In practice, academia and government are as close as ticks on a hound dog. Why do they all think the same thing and why do they all believe in the mechanical model: they’re paid to believe it. This, from The Huffington Post:
How the Federal Reserve Bought the Economics Profession
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.
“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”
One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll – and the rest have been in the past.
The Fed has been dominating the profession for about three decades. “For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s,” says University of Texas economics professor – and Fed critic – James Galbraith. “The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn’t a culture of consulting, and it wasn’t the same vast network of professional economists working there.”
But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and “officers” – who are generally also economists – the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million.
The Federal Reserve’s Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a “visiting scholarship.” A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.
That’s a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list “monetary policy, central banking, and the supply of money and credit,” as either their primary or secondary specialty; 310 list “money and interest rates”; and 244 list “macroeconomic policy formation [and] aspects of public finance and general policy.” The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their “Financial Roundtable,” the closest way they can approximate a focus on monetary policy and central banking.
The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank’s money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.
“Try to publish an article critical of the Fed with an editor who works for the Fed,” says [James] Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.
The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.
HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.
At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.
What if you didn’t believe that the grease-monkeys working for the Fed really could make things better? What if you thought an economy wasn’t like a machine at all? What if you didn’t believe economists could control it? Or improve it? Or even understand it? What if you thought that you could not predict what would happen…nor could you turn any screws or valves or knobs and be able to tell what effect it would have? Who would hire you? Who would publish your book? Who would ask your opinion at cocktail parties or invite you to submit articles to The Financial Times? No one.
But you would be right.
An economy is not really like a machine at all. It is not a mechanical system. It is a moral system.
Yes, dear reader, it is a system that punishes sin and rewards virtue. It gives no one what he expects…and ALMOST everyone what he deserves. The “almost” is an important qualifier, to which we will return…
What do we mean when we say it “rewards virtue”? Well, that’s what it does. It rewards saving, thrift, hard work, innovation, honesty, thinking about others, self-discipline, creativity and all the other qualities you normally associate with decent people and financial progress.
As for sin, it punishes the obvious ones – greed, vanity, short-sightedness, extravagance, envy, laziness, lying, cheating, stealing, stupidity, self-indulgence…and so forth.
When the Fed creates money out of thin air, for example, it is a lie. It is a sort of fraud. It is trying to get something for nothing. It is distorting the facts and encouraging mistakes. It surely will be punished. When? How? We can take a guess, but it’s not for us to say….
Likewise, take a fellow who works hard and saves his money… Will he be wealthy? Again, we don’t know. All we know is that he OUGHT to do well…
So, we should return to our qualifier…it USUALLY works that way.
Some greedy bastards do get rich. Some lazy fools win the lottery. We never know for sure who will make money and who won’t.
Why not? First, because we’re not God. He sees things we don’t see…and He has his own plans that he doesn’t share with us.
Second, because there is sin and virtue IN THE SYSTEM itself…to which we are all subject. When the Roman Empire fell apart, and Rome was sacked by barbarians, even the most virtuous Roman probably suffered a decline in his standard of living. Not much he could do about it.
Why would a system that rewards virtue and punishes sin be so frustratingly unreliable?
Well, that’s just the way it is. It’s a moral system, remember. And moral systems do not make it easy for you. If all you had to do to get rich were to respect the moral rules it would not be a moral system. It would be a simpleton’s system. Everyone would follow the rules. Moral systems are more demanding. They require you to follow the rules without being sure what it will do for you.
As every theological thinker from St. Augustine to Billy Sunday has noticed, you can’t get to heaven just by following the rules. That would be too easy. Instead, you follow the rules…and HOPE to get heaven by the grace of God. Similarly, you have to follow the rules of an economy…knowing you might not get rich after all.
There’s no gaming the system. There’s no pretending. There are no quick fixes…no shortcuts…and no guarantees. And even if this isn’t true, you’re better off believing it anyway.
You have to love virtue for its own sake. And hate sin.
And keep your fingers crossed.
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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Bill, great article. The story below captures the essence of what you described.
The Fable of the Roasted Pig
Once upon a time, a forest where some pigs lived, caught on fire and
all the pigs were roasted. People, who at that time were in the habit
of eating raw meat only, tasted the roasted pigs and found them
delicious. From that time on, whenever men wanted roasted pork they
set a forest on fire.
Due to the many bad points of “the system,” complaints grew at an
increasing rate, as the system expanded to involve more and more
people. It was obvious that “the system” should be drastically
changed. Thus every year there were any number of conventions, and
congresses, and a considerable amount of time and effort was spent on
research to find a solution. But apparently no way of improving the
system was ever found, for the next year and the year after and the
year after that there were once more conventions and congresses and
conferences. And this went on and on and on…
Those who were experts on the subject put down the failure of the
system to a lack of discipline on the part of the pigs, who would not
stay where they should in the forests; or to the inconstant nature of
fire, which was hard to control; or to the trees, which were too
green to burn well; or the dampness of the earth; or the official
method of setting the woods on fire or….or….
There were men who worked at setting the woods on fire (firemen).
Some were specialists in setting fires by night, others by day. There
were also the wind specialists, the anemotechnicians. There were huge
compounds to keep the pigs in, before the fire broke out in the
forest, and new methods were being tested on how to let the pigs out
at just the right moment. There were technicians in pig feeding,
experts in building pig pens, professors in charge of training
experts in pig pen construction, universities that prepared
professors to be in charge of training experts in pig pen
construction, research specialists who bequeathed their discoveries
to the universities that prepared professors to be in charge of
training experts in pig pen construction, and…
One day a fireman named John Commonsense said that the problem was
really very simple and easily solved. Only four steps need to be
followed: (1) the chosen pig had to be killed, (2) cleaned, (3)
placed in the proper utensil, and (4) placed over the fire so that it
would be cooked by the effect of the heat and not by the effect of
the flames.
The director general of roasting himself came to hear of this
Commonsense proposal, and sent for John Commonsense. He asked what
Commonsense had to say about the problem, and after hearing the four
point idea he said:
“What you say is absolutely right–in theory, but it won’t work in
practice. It’s wasteful. What would we do with our technicians, for
instance?”
“I don’t know,” answered John.
“Or the specialists in seeds, in timber? And the builders of
seven-story pig pens, now equipped with new cleaning machines and
automatic scenters?”
“I don’t know.”
“Can’t you see that yours is not the solution we need? Don’t you know
that if everything was as simple as all that, then the problem would
have been solved long ago by our specialists? Tell me, where are the
authorities who support your suggestion? Who are the authors who say
what you say? Do you think i can tell the engineers in the fire
division that it is only a question of using embers without a flame?
And what shall be done with the forests that are ready to be burned -
forests of the right kind of trees needed to produce the right kind
of fire, trees that have neither fruit, nor leaves enough for shade,
so that they are good only for burning? What shall be done with them?
Tell me!”
“I don’t know.”
What you must bring, are realistic solutions, methods to train better
wind technicians; to make pig sties eight stories high or more,
instead of the seven stories we now have. We have to improve what we
have; we cannot ignore history. So bring me a plan, for example, that
will show me how to design the crucial experiment which will yield a
solution to the problem of roast reform. That is what we need. You
are lacking in good judgement, Commonsense! Tell me, if your plan is
adopted, what would I do with such experts as the president of the
committee to study the integral use of the remnants of the
ex-forests?”
“I’m really perplexed,” said John.
“Well, now, since you know what the problem is, don’t go around
telling everybody you can fix everything. You must realize the
problem is serious and complicated; it is not so simple as you had
supposed it to be. An outsider says, “I can fix everything.”
But you have to be inside to know the problems and the difficulties.
Now, just between you and me, I advise you not mention your idea to
anyone, for your own good, because I understand your plan. But, you
know, you may come across another boss not so capable of
understanding as I am. You know what that’s like, don’t you, Eh?”
Poor John Commonsense didn’t utter a word. Without so much as saying
goodbye, stupefied with fright and puzzled by the barriers put in
front of him, he went away and was never seen again.
It was never known where he went. That is why it is often said that
when it comes to reforming the system, Commonsense is missing.
- Anonymous
…and now…let us bow our heads…”..o gentle winds of the profit…lift me upon thy current to wealth eternal….carry me in ecstasy to trillions….love me unblemished money…find me o liquidous capital…claim me in a whim and set me upon the ethereal throne of perfumed quadrillions…..”…
Good article! I agree with almost everything about the observations on the system called the economy, except the part about moral and theological posturing.
Calling an economy a moral system carries with it a moralistic or idealistic bias.
It may be better described as a humanistic and complex adaptive system. Because of the influence of human emotions, moods, caprice and frailty, the economy is obviously not amenable to mechanistic explanations and linear forecasts that are more suitable to physical phenomena and forces.
But we can try to apply naturalistic explanations to economic behavior that takes due account of the complexity of human perception of events and their reaction to it
Economies, as is life are not simply about wealth or the things we own. Their is a quality of life component which most fail to grasp.
If all you love is money, power and recognition then you will lead a poor existence. You can be “rich” without all those things. A rich life, just like beauty is in the eye of the beholder.
The simple point is that an economy left alone without much government interference will run itself.
You need freedom, property rights, laws to enforce contracts… and that is about it.
And Phelps, don’t know being rich until you have tried it.
TIF, when I grow-up I hope to be just like you. Just kidding. You and I are different thats all. Don’t separate your shoulder patting yourself on the back!
i agree, they should close down the bath hosues, abolish the taverns, and get the spinning jennny’s rolling again. for if the protestant work ethic was good enough to get the faithfull to heaven, then it should bring paradise to the american consumer, After all the asians slaving their guts out for years now and the only thing they have to show for it is bollywood
The 401(k) was never more than a ploy to “monetize” a stream of income for money managers while reducing pension costs for corporations (who then paid high bonuses to the people who provided these cost savings and so increased profits). There was never any real possibility that the math on American wages would EVER add up to a fully-funded retirement for most people.
“…Today, we reveal – for the first time ever – why Ben Bernanke is an idiot. And why almost all modern economists are wrong. And why all the trillion-dollar “recovery” schemes won’t work.”
“…First, because we’re not God. He sees things we don’t see…and He has his own plans that he doesn’t share with us…”
what if it’s God who has chosen Bernanke to destroy this imbecilic, blind and selfish civilization.
Tom Friedman wrote in his Op-Ed, “No, Mr. Bernanke is not blameless for the 2008 crisis. But since then he has helped steer the country back from the brink and kept us out of a depression. He absolutely deserves reappointment.” See http://www.nytimes.com/2010/01/27/opinion/27friedman.html.
Again Thomas Friedman is a statist and hates a true free market. He is a sham.
lol, when did the HPost “print” this ancient noose? i’m afeared 2 go there b/c i tried it once, and it didn’t work!
FreddyMcMahon first gave me a li’l shuck by using the NYT to evaluate “his” namesake. then i read the crap, which i youseUally don’t do b/c they wantamoi to “sign upsky” so i can get it, 4 free!
morally, we are enjoined to “judge not”, neither negatively NOR positively, maybe b/c it is a moral “trap” in itself, and pretty much everybody’s fave, certainly the darling of today’s tennis set.
yet, we much use our judge-mental faciles, how tf* do we operate in these nor-wiggie woods? by debating ideas with our skull-skills from skool rather than our gut, which although much quicker on the draw, is usually the last stair swept on the way outa the base-ment? we can still express our true feelings, our values, but we need to learn about and understand how the projection room operates, to be play-tonic, here. no matter where a guy/gal is at on the stairway to heaven, one is either strugglonging to get some control over this, or one re-mains a sleeping, robotic, “machine”. this is the true meaning of “progress”? evel-lotion?
Part deux:
so, how do we “evaluate” and dia-log in this dense wood? let’s use Thom. effer, ok?
you, WILL, of course, proceed w/ yer own anal-y-sis, right. don’t pull the plug on yerSELF!!!
although i only had “time” to read this thru quickly, here’s what i saw from my curse-airy glance:
1) yeh, most obviously, the Batmanke (t.y., chuck!) stuff. but, have you ever had to “play dumb” at your JOB, 4 some reason, like BillyB, recently? so, take a note, but no gig, ok?
2) actually, 2 is 1, for me: does he not “get” the difference b/tween a public emplyees’ Union, and REAL union? the public ones put US on the street, while the REAL ones, if they follow the wrong leader, put THEMSELVES on the street. 2a) TF doesn’t “get” that prez0bummer neglected to uphold the “LEGAL contract” w/ bond holders in the GM b.s.? 2c) his “partisan” analysis of “health care” is simply, not true, imOPINION. gigX3, that i see.
3) he’s getting “close” about the squid: subtract 1/2 gig.
4) ok, i’m peeking, i confess! !That said, PART OF ME can’t blame the president.” Wow: subtract one gig, for we are REQUIRED to be a little generous in this “process”
5) his omega line: “Without that, we’ll just be digging our hole deeper and making the RECKONING, when it comes, that much more ferocious.” holy printer’s ink, Batmanke! +1.5!!!
MY SCORE: -3+.5+1+1.5 = ZERO. we shld BE so good!
also, i sense that he mighta changed his “stance” and put the other foot forward, if you follow. just something i “hear”, prob, tho. he’ll prob get his dumash FIRED, but maybe someone could get him onto
the huffpost. besides, at his age he might not sploosh as fast as some of US angels, eh?
BEsides, he is FUN to play with, and we can always the moose-headed tool, later, right, g8rs?
Yet another brilliant article by Mr. Bill Bonner!
I haven’t read something close to that recently, indeed.
My respect an keep on reckoning, Mr. Bonner!
Mankind is a Moral System. The Economy in the other side is like a river and money is the water. Think about it!
The expected comments railing against the fact that it’s a moral universe are evident. Usually anti-moralists want to have their cake and eat it too, though. They want their freedom from “conventional morality” and yet want to be able to call their particular object of hatred a lying, stealing, murdering SOB if they so desire. Can’t have it both ways. Thanks Bill, for giving us a hint of the unity of things.