{"id":62044,"date":"2014-10-16T16:00:22","date_gmt":"2014-10-16T20:00:22","guid":{"rendered":"http:\/\/countingpips.com\/?p=62044"},"modified":"2014-10-16T16:00:22","modified_gmt":"2014-10-16T20:00:22","slug":"outside-the-box-calling-into-question","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/10\/outside-the-box-calling-into-question\/","title":{"rendered":"Outside the Box: Calling Into Question"},"content":{"rendered":"
October 16, 2014<\/div>
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By John Mauldin<\/span><\/h4>\n
\"\"A note has been circulating among economists, calling into question the wisdom of another group of economists who wrote an open letter to the Federal Reserve a few years ago suggesting that one of the risks of their quantitative easing program was increased inflation. Since we have not seen CPI inflation, this latter group is calling upon the former to admit they were wrong, that quantitative easing does not in fact cause inflation. To no one\u2019s surprise, Paul Krugman has written rather nastily and arrogantly about the lack of CPI inflation.<\/p>\n

Cliff Asness has responded with a thoughtful letter, with his usual tinge of humor, pointing out that there has been inflation, it just hasn\u2019t been in the CPI. We\u2019ve seen it in assets instead. That money did go someplace, and it has disrupted markets. So why is Cliff\u2019s letter a candidate for Outside the Box,<\/em> when the markets seem to be bouncing all over heck and gone?<\/p>\n

Because, come the next crisis, there is going to be another move for yet another round of massive quantitative easing. And the justification will be that increases in the money supply clearly don\u2019t have much to do with inflation.<\/p>\n

I should note that while I did not agree with the original letter (I thought we were in an overall deflationary environment, and I wrote that the central banks of the world would be able to print more money than any of us could possibly imagine and still not trigger inflation \u2013 views came in for considerable pushback), my reasons for believing QE2 and QE3 were problematic dealt with other unintended consequences. And ultimately, as global debt gets restructured (which will take many years) inflation will become a problem. Did you notice how Greek debt spreads blew out yesterday? It\u2019s not just about oil. And trust me, France is going to be the new Greece before we know it. The people who think they can control markets and direct investors like sheep are going to be in for a huge surprise, but the nightmare is going to be visited upon the participants in the market.<\/p>\n

We then move to a few thoughts from Peter Boockvar, in a letter he writes to savers, noting that the same people who brought you quantitative easing are also responsible for the demise of any income that might possibly have come from saving.<\/p>\n

I wish I had good advice for your savings, but I can\u2019t advise buying stocks that have only been more expensive in 2000 on some key metrics right before you know what, and I can\u2019t recommend buying any long term bond as the yields also stink relative to inflation. With the Fed now saying that the dollars in your pocket are now worth too much relative to money in people\u2019s pockets overseas and thus joining the global FX war, maybe you should buy some gold, but I know that yields nothing either. You are the sacrificial lamb in this grand experiment conducted by the unelected officials working at some building named Eccles who seem to have little faith in the ability of the US economy to thrive on its own as it did for most of its 238 years of existence. Borrowers and debt are their only friends. To you responsible saver that worked hard your whole life, may you again rest in peace.<\/p>

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And then we finish with some thoughts from our friend Ben Hunt, who takes exception to being told how to think and believe and act by \u201cthose smart people with degrees\u201d who only want to do what\u2019s best for us. Not just in economics but with regard to ISIS and Ebola and everything else. After reading Ben\u2019s essay I called him and said, \u201cMe too!\u201d<\/p>\n

I am tired of being manipulated, placated, spin-lied to (if it\u2019s not a word it should be), mutilated, spindled, and folded.<\/p>\n

We have to keep our eyes open and entertain the possibility that central banks will \u201close the narrative,\u201d that is, their ability to control markets with simple statements. The BIS recently had this to say:<\/p>\n

Guy Debelle, head of the BIS\u2019s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to \u201cblow up\u201d [at] the first sign of stress.<\/p>\n

Mr. Debelle said the markets may at any time start to question whether the global authorities have matters under control, or whether their pledge to hold down rates through forward guidance can be believed. \u201cI find it somewhat surprising that the market is willing to accept the central banks at their word, and not think so much for themselves,\u201d he said. [Source: Ambrose Evans-Pritchard, \u201cBIS warns on ‘violent’ reversal of global markets<\/a>\u201d]<\/p>\n

The 10-year US Treasury slipped below 2% earlier today, but has rebounded somewhat to 2.06% as I write. Oddly, the yen seems to be strengthening slightly as the stock markets once again fall out of bed. Oil continues to weaken. As noted above, Greeks spreads are blowing out. Super Mario needs to get on his bike and start peddling before that concern spreads to other nations almost as insolvent. France will soon be downgraded again. Don\u2019t you just love October?<\/p>\n

What an interesting time to hold a midterm election. Have a great week!<\/p>\n

Your really thinking through the implications of a stronger dollar analyst,<\/p>\n

John Mauldin, Editor
\nOutside the Box<\/em>subscribers@mauldineconomics.com<\/a><\/p>\n

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The Inflation Imputation<\/strong><\/span><\/h2>\n

By<\/strong> Cliff Asness, <\/strong>AQR Capital Management LLC<\/p>\n

In 2010, I co-signed an open letter<\/a> warning that the Fed\u2019s experiment with an unprecedented level of loose monetary policy \u2013 in amount, and in unorthodox method \u2013 created a risk of serious inflation. Sporadically journalists and others have noted that this risk has not come to pass, particularly in consumer prices. Recently there has been an article<\/a> surveying each of us as to why; seeming to relish in, when provided, our various rationales, presumably as they sounded like excuses. It seems none of the responses provided what the authors clearly wanted, a blanket admission of error. I did not comment for that article, continuing my life long attempt not to help reporters who\u2019ve already made up their mind to make fun of me \u2013 I help them enough through my everyday actions, they don\u2019t need more!<\/p>\n

More articles of similar bent<\/a> keep showing up. The authors seem to find it amusing that four years of CPI data wouldn\u2019t get people to change their economic views, while ignoring that 80 years of overwhelming evidence has not dissuaded Keynesians from the belief that this time, if they could only run everything, not just most things, they\u2019d really get it right.<\/p>\n

Focusing my attention, as was predestined, Paul Krugman lived up to his lifelong motto of \u201cstay classy\u201d with a piece on the subject entitled Knaves, Fools, and Quantitative Easing<\/em><\/a>. Some lesser lights of the Keynesian firmament have also jumped in<\/a> (collectivists, of course, excel at sharing a meme). Responding to Krugman is as productive as smacking a skunk with a tennis racket. But, sometimes, like many unpleasant tasks, it\u2019s necessary. I will, at least partially, make that error here, while mostly trying to deal with the original issue separate from Paul\u2019s screeds (though one wonders if CPI inflation had risen in the last four years if Paul would be admitting his entire economic framework was wrong \u2013 ok, one doesn\u2019t really wonder \u2013 and those things never happen to Paul anyway, just ask him).<\/p>\n

Let me say up front that this essay will satisfy nobody. Those looking for a blanket admission of error will get part of what they want; a small part. Those hoping I hold the line denying any misstep will also be disappointed. I believe truth, as is often the case in similar situations, lies in the middle of these and I prefer truth, as I see it, to any reader walking away sated.<\/p>\n

We indeed warned about the risks of inflation in 2010 and the CPI has been, to put it mildly, benign since then. First, to give the baying crowd just a bit of what it wants (I will take some of it back soon), our bad<\/em> (I say \u201cour\u201d but obviously I speak only for myself). When you warn of a risk and it doesn\u2019t come to pass I do think you owe the world this admission, even if you later explain what it means to warn of a risk not a certainty, and offer good reasons why despite reasonable worry this particular risk didn\u2019t come to pass. I, and many other signatories, live in the world of economic or political prognostication, in my case money management, where if you get a bit more than half your calls right you are doing quite well, more than a bit more than half, you\u2019re doing fabulously. I\u2019ll put our collective record up against Krugman\u2019s (and the Krug-Tone back-up dancers) any day of the week and twice on days he publishes.<\/p>\n

Let\u2019s start with the big one. We did not make a prediction, something we certainly know how to do and have collectively done many times. We warned of a risk. That\u2019s a very specific choice people like the open letter writers, and Paul, have to make all the time, and he knows this, but that doesn\u2019t deter him. Rather, Paul engages in the old debating trick of mentioning this argument himself and dismissing it. This technique worked for Eminem at the end of Eight Mile<\/em>. But let\u2019s not be fooled by chicanery (silly Paul, you are no Rabbit). If I had wanted to make a prediction, I would have made one. I didn\u2019t, nor did my fellow signatories. Frankly, if there are any economists, aside from those never-uncertain-but-usually-wrong like Paul, who did not think such unprecedented Fed action represented at least a heightened risk, I think it was malpractice on their part. An honest Paul Krugman (we will use this term again below but this is something called a \u201ccounter-factual\u201d) would have agreed with our letter but qualified that while heightened, he still didn\u2019t think this risk would come to fruition and that he thought it was a risk worth running. Still, I will give the critics half credit here, accept half blame, and issue a demi mea culpa<\/em>. By writing the letter we clearly thought this risk was higher than others did, and wished to stress it, and it has not (as most commonly measured) as of now come to bear. Our, and my, (half) bad. I hope that makes the critics (half) happy and they can stop copying each other\u2019s articles over and over again.<\/p>\n

Of course being able to call out risks, not just make firm predictions, is quite important. If you believe the risk of an earthquake is 10 times normal, but 10 times normal is still not a high probability, it\u2019s rational to warn of this risk, even if the chance such devastation occurs is still low and you\u2019ll look foolish to some when it, in all likelihood, doesn\u2019t happen. If you can\u2019t point out risks you are left with either silence as an option, or overly and falsely self-confident forecasts. Perhaps the latter may work for former economists turned partisan pundits but the rest of us will have to live with the ex ante and ex post ambiguity of discussing risks. It\u2019s a real subtlety but I think there is truth somewhere in between the current attack meme of \u201cyou predicted inflation risk and were wrong and are now hiding behind the word \u2018risk\u2019\u201c and \u201cwe only said it was a risk so we cannot be wrong.\u201d I think when you boldly forecast a risk you are saying more than \u201cthis might happen but either way I can\u2019t be blamed\u201d and something less than \u201cthis will happen and I stake my reputation on it.\u201d We should all be mature enough to know the difference, but apparently that ship has sailed…<\/p>\n

Not surprisingly, the above stress on risk jibes with my personal view of monetary policy, one that might not be shared by all my co-signatories. I tend to think it matters less than most think, and matters less often than most think. I tend to view it, for finance fans, in a \u201cModigliani Miller\u201d (MM) framework, where most corporate financing transactions are paper-for-paper, mattering little. But, in the MM framework bankruptcy costs do matter. Therefore most corporate capital structure decisions are irrelevant, except to the extent they increase the chance of serious financial distress, in which everyone but the lawyers lose (in many models this risk must be balanced against the tax advantages of debt).<\/p>\n

From this perspective, slight adjustments to the target Fed funds rate based on exquisitely sensitive perceptions of the probability of economic overheating or slowdown probably make little difference (and don\u2019t even start me on the dots), but deflation or excessive inflation are important to avoid as their damage can be great. They are the bankruptcy costs of monetary policy. Thus, I think sounding the alarm, not making a prediction, that experimental and aggressive monetary policy raised one of these risks was appropriate. But, still, I think most people engaged on the topic spend a lot of time talking about monetary policy in the same way dogs spend a lot of time talking, yes in their secret dog language, about the cars they chase. The cars aren\u2019t affected and generally don\u2019t care.<\/p>\n

Now, if you thought the above was an excuse on par with, continuing my canine fixation, \u201cthe dog ate my inflation,\u201d and not the demi mea culpa<\/em> I intended, you\u2019re really going to hate the full blown non-conciliatory excuses about to come.<\/p>\n

Economically, I think what everyone of any political or economic stripe missed, certainly including myself, was how little money would circulate, how little would be lent and then spent. In econo-geek, how low the money multiplier would be. Money kept by banks at low but positive interest rates at the Fed clearly isn\u2019t doing much of anything, creating inflation as we feared, or helping the economy as they hoped. To the extent inflation worriers like us were wrong, so were those predicting great economic benefits. The Fed clearly wanted this money lent by banks and spent by companies on investment and by people on consumption. They didn\u2019t get that, and we didn\u2019t get the inflation we feared. This is not to say that low interest rates, real and nominal, and high prices for risky assets (and the supposed \u201cwealth effect\u201d that comes with them) were not Fed goals. They clearly were. But it seems these intermediate goals have not had their desired effect on the real economy.<\/p>\n

Quantitative easing (QE) and other inventive forms of loose monetary policy have simply been less than hoped or feared. Some may declare Fed policy a great success as we\u2019re not in a depression, but they can\u2019t show any counter-factual, and given that this money has largely sat dormant, albeit presumably lowering risk premia (raising asset prices), it\u2019s likely we\u2019d have a similar record-weak recovery with or without it. How this is a victory for one side of the debate or another is beyond me, but obviously clear to Paul and his back-up singers. Of course, it\u2019s also clear to Paul that the 2009 stimulus package saved us from this same second Great Depression (but more stimulus would of course have been much better). Yep, and if we traded good cash for just one more \u201cclunker\u201d we\u2019d be growing at 5% per annum by now with a normal labor participation rate.<\/p>\n

By-the-way, ignored in the critics\u2019 review of the original letter was the line, \u201cIn this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program…\u201d On this I\u2019m unapologetic. We were right, we\u2019re still right, and thanks to people like Paul we\u2019ve moved in the wrong direction. But that\u2019s a fight for another day.<\/p>\n

In a field without a broad set of counter-factuals we all stick too much to our priors and ideologies, and perhaps I\u2019m doing that now. But at least I see it, and that\u2019s always step one. Paul is stuck on step zero (if he ever gets up to \u201cmaking amends\u201d I will be around but given his history he might never get to me). But, if you\u2019d like to advance past step zero, Paul, we\u2019re still waiting on why Keynesianism failed to fix the Great Depression (no doubt not quite enough stimulus; just one more Hoover Dam would have done it, or, as they called it back then, \u201cDams for Clunkers\u201d), strongly predicted a deep post-WWII depression, didn\u2019t predict stagflation, and generally was on a the downward spiral to the intellectual dustbin until the great recession resuscitated it, not as a workable intellectual doctrine, but as an excuse for politicians to spend on their constituents and causes.<\/p>\n

Also remember, much like when the Germans bombed Pearl Harbor<\/a>, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases. When monetary policy is back to historic norms, and economic growth is once again strong, a normal number of people are seeking and getting jobs, and inflation has not reared its head, I think we can close the books on this one, still recognizing that forecasting a risk and having it fail to come to bear is not a cardinal sin. But which one of those things has happened yet? Paul, and others, should by now know the folly of declaring victory too early.<\/p>\n

At the risk of enraging a whole different group (I promise I\u2019m not denying anything I\u2019m just making an analogy, and one I know is very far from dead on) I\u2019m amazed that a Paul Krugman can look at 15+ years of the earth not warming and feel his beliefs need no modification or explanation, but 4 years of the CPI not inflating is reason not simply to declare victory, but to decry those who disagree with him as \u201cKnaves and Fools.\u201d In fact, rather than also anger Mr. Gore and Steyer, I hope they find this paragraph supportive as I\u2019m saying these debates are rarely settled in either direction in short time frames. Now, if I were cheekier (cheek is not denial!) I\u2019d ask if perhaps our letter was right and the inflation we predicted is in fact occurring in the depths of the ocean? Or, maybe we should ex post relabel our letter a warning of the risk of \u201cextreme price action\u201d including of course the extreme stability we have experienced in CPI these last few years.<\/p>\n

Now, while not pointing to the actual ocean it is fascinating where inflation has shown up. Don\u2019t limit your view of inflation to the CPI. No, this isn\u2019t a screed where I claim to have invented my own consumption basket showing inflation is rising at 25% per annum \u2013 though some of those screeds are interesting. It\u2019s the far simpler observation that we have indeed observed tremendous inflation in asset prices since this experiment began (of course this was part of the Fed\u2019s intent \u2013 but it was meant to stoke real activity not an end unto itself!). Stocks, the spreads on high yield bonds, real estate, you name it. Inflation is hard enough to forecast, but where it lands is even harder. If one counts asset inflation it seems we\u2019ve indeed had tremendous inflation. While admittedly difficult to prove, as is any of this if we\u2019re being honest as economics rarely offers proofs, you\u2019d be hard pressed to find many economists or Wall Street professionals who don\u2019t see current extremely high<\/a> asset prices, and low forward looking returns to investors, as at least a partial consequence of the cocktail of QE, loose monetary policy, and financial repression. I understand Paul and others wanting to avoid this as not only does it show that they have no right to crow on inflation, but that the policies they advocate, and we decried, have had little effect on the economy but instead have, at least partially intentionally, exacerbated the inequality Paul spends the other half of his columns excoriating (while of course living himself off the global median income in protest and solidarity).<\/p>\n

By-the-way, again the critics somehow manage to skip another prescient forecast in this same short open letter. We explicitly worried that the Fed\u2019s policies \u201cwill distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.\u201d That\u2019s econo-geek for \u201cwill drive financial market prices up and prospective returns down, and create financial instability when the Fed tries to stop.\u201d Again, while this would perhaps not surprise the Fed, which actively desired low interest rates and a \u201cwealth effect,\u201d it seems that a fair reading shows that this much maligned letter wasn\u2019t as wrong as the critics say, and was very right in ways the critics ignore.<\/p>\n

Moving on, please recall that many, not all, supporters of QE and very loose monetary policy in general, did so exactly because they thought it would create some inflation, and they thought (and many still think) that\u2019s what the economy needs. We, we the letter signers, are responsible for our own forecasts, but you might forgive us a bit for taking the other side at their word!<\/p>\n

Bottom line, the half mea culpa<\/em> above was not a throw away. When you go out of your way to warn of a risk and after a suitable period that risk has not come to bear, at least where everyone, including you, expected it, you should admit some error, and I do. But there is a still a big difference between pointing out a risk and making a forecast (hence the half admission!). A big reason this risk hasn\u2019t come to fruition is, while not as dangerous so far as we thought, it appears QE was only mostly useless. To the extent even that is only mostly true, where effects did show up, it actually caused rather a lot of inflation, but inflation that went straight into the pockets of those who needed it least and whom Paul wouldn\u2019t swerve his car to avoid. That is, it inflated financial assets, benefited the rich, and enhanced inequality.<\/p>\n

So, to those who\u2019ve been waiting for one of us to say it, you can have half the mea culpa<\/em> you clearly want, but mostly Paul is wrong, and twisting the facts, and doing so as rudely and crassly as possible, yet again. The rest of the JV team of Keynesians who have also jumped on board are doing the same thing, just with more class and less entertainment value than the master.<\/p>\n

Now for a real prediction: Paul will continue to be mostly wrong, mostly dishonest about it, incredibly rude, and in a crass class by himself (admittedly I attempt these heights sometimes but sadly fall far short). That is a prediction I\u2019m willing to make over any horizon, offering considerable odds, and with no sneaky forecasts of merely \u201cheightened risks.\u201d Any takers?<\/p>\n

Cliff Asness is Founding and Managing Principal of AQR Capital Management, LLC<\/em><\/p>\n

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Dear Saver, May You RIP<\/strong><\/span><\/h2>\n

By Peter Boockvar,<\/strong> The Lindsey Group LLC<\/p>\n

Dear Saver,<\/p>\n

To the forgotten and misunderstood soul, may you rest in peace. There just seems that nothing can save you now. You were bloody and battered after the stock market bubble crashed in 2001 and 2002. Afterward, you stuck with stocks but also decided to play it safe in real estate. That was ok for a few years but your stock portfolio fell again by 50% and while you have a great new kitchen and wood paneled library, the value of your house is now worth much less than your mortgage. I know, renting can be so much easier! But some guy named Greenspan said something about a wealth effect.<\/p>\n

Finally you said enough is enough. You wanted a safe, conservative place for your savings where living off fixed income of mostly CD\u2019s and bonds was possible. Maybe you\u2019d buy an occasional stock again but maybe not. You called your local branch banker and were told that for the privilege of being a Platinum Honors client that you would be able to secure a better rate on a money market savings account. Nice! You were told that you\u2019d be able to get .10%, more than triple the standard rate of .03% that the average person gets! Disgusted, you went online and saw this great add on the Bank of America website, it said \u201cWith a Featured CD I can earn a fixed rate on my nest egg.\u201d Sounds enticing until you scrolled down the page and saw it paid .08% for a fixed 12 month term. It had to be a typo but unfortunately it was not.<\/p>\n

Questioning now how you can ever retire on your savings after working hard for the past 40 years, you decided to find out who can possibly be responsible for these pathetic yields when you know your cost of living is rising well above the 1.5-2% that these statisticians at the government keep telling you. You ask what an hedonic adjustment is? Don\u2019t worry about it because the purchasing power of your money relative to inflation has been declining day after day for at least 6 years now. This is madness you say. I agree.<\/p>\n

You started to read the papers and watched the news and learned that the men and women that work at the Federal Reserve, mostly economists who call themselves central bankers, sit around a large table and decide what the right interest rate should be. Ok you say, they are smart, they have models created by people that likely did really well on their SAT\u2019s, they know what they\u2019re doing and this can\u2019t last. Well, I\u2019m sorry to say to you, we\u2019re 6 years into zero interest rates and these people have no intention of ever saving your savings. You\u2019re screwed and even though they say it\u2019s in your best interest because zero rates and money printing will help the economy, don\u2019t believe them anymore because the strategy has failed. After all, If these policies actually worked, I wouldn\u2019t be writing this letter to you.<\/p>\n

I wish I had good advice for your savings but I can\u2019t advise buying stocks that have only been more expensive in 2000 on some key metrics right before you know what and I can\u2019t recommend buying any long term bond as the yields also stink relative to inflation. With the Fed now saying that the dollars in your pocket are now worth too much relative to money in people\u2019s pockets overseas and thus joining the global FX war maybe you should buy some gold but I know that yields nothing either. You are the sacrificial lamb in this grand experiment conducted by the unelected officials working at some building named Eccles who seem to have little faith in the ability of the US economy to thrive on its own as it did for most of its 238 years of existence. Borrowers and debt are their only friends. To you responsible saver that worked hard your whole life, may you again rest in peace.<\/p>\n

Sincerely yours,<\/p>\n

Peter Boockvar
\nManaging Director
\nChief Market Analyst
\nThe Lindsey Group LLC<\/p>\n

 <\/p>\n

Calvin the Super Genius<\/strong><\/span><\/h2>\n

By Ben Hunt, Ph.D.,<\/strong> Salient<\/p>\n

\"\"<\/p>\n

People think it must be fun to be a super genius, but they don\u2019t realize how hard it is to put up with <\/strong>all the idiots in the world. \u00a0\u2013 Bill Watterson, \u201cCalvin and Hobbes\u201d<\/strong><\/p>\n

Here is the most fundamental idea behind game theory, the one concept you MUST understand to be an effective game player. Ready?<\/p>\n

You are not a super genius, and we are not idiots.\u00a0 <\/strong>The people you are playing with and against are just as smart as you are. Not smarter. But just as smart.\u00a0 If you think that you are seeing more deeply into a repeated-play strategic interaction (a game!) than we are, you are wrong. And ultimately it will cost you dearly.<\/strong>\u00a0 But if there is a mutually acceptable decision point \u2013 one that both you and we can agree upon, full in the knowledge that you know that we know that you know what\u2019s going on \u2013 that\u2019s an equilibrium. And that\u2019s a decision or outcome or policy that\u2019s built to last.<\/p>\n

Fair warning, this is an \u201cAngry Ben\u201d email, brought on by the US government\u2019s \u201ccommunication policy\u201d on Ebola, which is a mirror image of the US government\u2019s \u201ccommunication policy\u201d on markets and monetary policy, which is a mirror image of the US government\u2019s \u201ccommunication policy\u201d on ISIS and foreign policy. We are being told what to think about Ebola and QE and ISIS.<\/strong> Not by some heavy-handed pronouncement as you might find in North Korea or some Soviet-era Ministry, but in the kinder gentler modern way, by a Wise Man or Woman of Science who delivers words carefully chosen for their effect in constructing social expectations and behaviors.<\/p>\n

The words are not lies. But they\u2019re only not-lies because if they were found to be lies that would be counterproductive to the social policy goals, not because there\u2019s any fundamental objection to lying. The words are chosen for their\u00a0 truthiness<\/em>, to use Stephen Colbert\u2019s wonderful term, not their truthfulness. The words are chosen in order to influence<\/em> us as manipulable objects, not to inform<\/em> us as autonomous subjects.<\/strong><\/a><\/p>\n

It\u2019s always for the best of intentions. It\u2019s always to prevent a panic or to maintain confidence or to maintain social stability. All good and noble ends. But it\u2019s never a stable equilibrium. It\u2019s never a lasting legislative or regulatory peace. The policy always crumbles in Emperor\u2019s New Clothes fashion because we-the-people or we-the-market have not been brought along to make a self-interested, committed decision.<\/strong>Instead the Powers That Be \u2013 whether that\u2019s the Fed or the CDC or the White House \u2013 take the quick and easy path of selling us a strategy as if they were selling us a bar of soap.<\/p>\n

This is what very smart people do when they are, as the Brits would say, too clever by half. This is why very smart people are, as often as not, poor game players. It\u2019s why there aren\u2019t many academics on the pro poker tour. It\u2019s why there haven\u2019t been many law professors in the Oval Office. This isn\u2019t a Democrat vs. Republican thing. This isn\u2019t a US vs. Europe thing. It\u2019s a mass society + technology thing. It\u2019s a class thing. And it\u2019s very much the defining characteristic of the Golden Age of the Central Banker.<\/p>\n

Am I personally worried about an Ebola outbreak in the US? On balance \u2026 no, not at all. But don\u2019t tell me that I\u2019m an idiot if I have questions about the sufficiency of the\u00a0social<\/em> policies<\/em> being implemented to prevent that outbreak. And make no mistake, that\u2019s EXACTLY what I have been told by CDC Directors and Dr. Gupta and the White House and all the rest of the super genius, supercilious, remain-calm crew.<\/p>\n

I am calm. I understand that a victim must be symptomatic to be contagious. But I also understand that one man\u2019s symptomatic is another man\u2019s \u201cI\u2019m fine\u201d, and questioning a self-reporting immigration and quarantine regime does not make me a know-nothing isolationist.<\/p>\n

I am calm. I understand that the virus is not airborne but is transmitted by \u201cbodily fluids\u201d. But I also understand why Rule #1 for journalists in West Africa is pretty simple: Touch No One<\/a>, and questioning the wisdom of sitting next to a sick stranger on a flight originating from, say, Brussels does not make me a Howard Hughes-esque nutjob.<\/p>\n

I am calm. I understand that the US public health and acute care infrastructure is light years ahead of what\u2019s available in Liberia or Nigeria. I understand that Presbyterian Hospital in Dallas is not just one of the best health care facilities in Texas, but one of the best hospitals in the world. But I also understand that we are all creatures of our standard operating procedures, and what\u2019s second nature in a hot zone will be slow to catch on in the Birmingham, Alabama ER where my father worked for 30 years.<\/p>\n

The mistake made by our modern leaders \u2013 in every public sphere! \u2013 is to believe that they are operating on a deeper, smarter, more far-seeing level of game-playing than we are. I\u2019ve got a long example of the levels of decision-making in the Epsilon Theory note \u201cA Game of Sentiment<\/a>\u201c, so I won\u2019t repeat all that here. The basic idea, though, is that by <\/strong>announcing<\/em><\/strong> a consensus based on the Narrative authority of Science<\/em><\/strong><\/a> our leaders believe they are stacking the deck for each of us to buy into that consensus as our individual first-level decision.<\/strong> This can be quite effective when you\u2019re promoting a brand of toothpaste, where it is impossible to be proven wrong in your consensus claims, much less so when you\u2019re promoting a social policy, where all it takes is one sick nurse to make the entire linguistic effort seem staged and for effect \u2026 which of course it was. The fact that we go along with a game \u2013 that we act AS IF we believe in the Common Knowledge of an announced consensus \u2013 does NOT mean that we have accepted the party line in our heart of hearts.<\/strong><\/a> It does NOT mean that we are myopic game-players, unerringly led this way or that by the oh-so-clever words of the Missionaries<\/a>. But that\u2019s how it\u2019s been taken, to terrible effect.<\/p>\n

I am calm. But I am angry, too. It doesn\u2019t have to be this way \u2026 this consensus-by-fiat style of policy leadership where we are always only one counter-factual reveal \u2013 the sick nurse or the sick economy \u2013 away from a breakdown in market or governmental confidence. I am angry that we have been consistently misjudged and underestimated, treated as children to be \u201ceducated\u201d rather than as citizens to be trusted. I am angry that our most important political institutions have sacrificed their most important asset \u2013 <\/strong>not their credibility, but their authenticity<\/em><\/strong><\/a> \u2013 on the altar of political expediency, all in a misconceived notion of what it means to lead<\/em>.<\/strong><\/p>\n

And yet here we are. On the precipice of that breakdown in confidence. A cold wind of change is starting to blow. Can you feel it?<\/p>\n

W. Ben Hunt, Ph.D.
\nChief Risk Officer, Salient<\/p>\n

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Important Disclosures<\/em><\/strong><\/a><\/p>\n

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 <\/p>\n<\/div>\n

The article Outside the Box: Calling Into Question<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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By John Mauldin A note has been circulating among economists, calling into question the wisdom of another group of economists who wrote an open letter to the Federal Reserve a few years ago suggesting that one of the risks of their quantitative easing program was increased inflation. Since we have not seen CPI inflation, this […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-62044","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/62044","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=62044"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/62044\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=62044"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=62044"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=62044"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}