{"id":77680,"date":"2015-09-01T10:45:34","date_gmt":"2015-09-01T14:45:34","guid":{"rendered":"http:\/\/countingpips.com\/?p=77680"},"modified":"2015-09-01T10:45:34","modified_gmt":"2015-09-01T14:45:34","slug":"thoughts-from-the-frontline-weapons-of-economic-misdirection","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/09\/thoughts-from-the-frontline-weapons-of-economic-misdirection\/","title":{"rendered":"Thoughts from the Frontline: Weapons of Economic Misdirection"},"content":{"rendered":"
September 1, 2015<\/div>
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By John Mauldin<\/span><\/h4>\n
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\u201cMeasurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis.<\/p>\n

\u201cIn \u2018pure\u2019 science, we can form a better, more coherent, and objective picture of the world, based on the information measurement provides. The information allows us to create models of (parts of) the world and formulate laws and theorems. We must then determine (again) by measuring whether these models, hypotheses, theorems, and laws are a valid representation of the world.\u201d<\/p>\n

\u2013 Gauri Shankar Shrestha<\/a><\/p>\n

\u201cIn science, the term observer effect refers to changes that the act of observation will make on a phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.<\/p>\n

\u201cIt was, perhaps, the most unusual episode in the long running duel between the two giants of twentieth century economic thought. During World War Two, John Maynard Keynes and Friedrich Hayek spent all night together, alone, on the roof of the chapel of King\u2019s College, Cambridge. Their task was to gaze at the skies and watch for German bombers aiming to pour incendiary bombs upon the picturesque small cities of England\u2026.<\/p>\n

\u201cNight after night the faculty and students of King\u2019s, armed with shovels, took it in turns to man the roof of the ornate Gothic chapel, whose foundation stone was laid by Henry VI in 1441. The fire watchmen of St. Paul\u2019s Cathedral in London had discovered that there was no recourse against an exploding bomb, but if an incendiary could be tipped over the edge of the parapet before it set fire to the roof, damage could be kept to a minimum. And so Keynes, just short of sixty years old, and Hayek, aged forty-one, sat and waited for the impending German onslaught, their shovels propped against the limestone balustrade. They were joined by a common fear that they would not emerge brave nor nimble enough to save their venerable stone charge.\u201d<\/p>

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\u2013 Nicholas Wapshot in Keynes Hayek: The Clash That Defined Modern Economics<\/a><\/em><\/p>\n

\u201cI picked the wrong week to stop sniffing glue.\u201d<\/p>\n

\u2013 Lloyd Bridges in Airplane!<\/em><\/p>\n

I write these words feeling a little bit like the Lloyd Bridges character in Airplane!<\/em> With global markets going crazy, I obviously picked the wrong week to go on vacation.<\/p>\n

On the other hand, maybe it was exactly the right week. I decided last week that I would rerun something from the archive for this week\u2019s Thoughts from the Frontline<\/em>. That freed me to think about the week\u2019s events from a different perspective. It also gave me time for some long conversations with friends who are real experts. I learned some things I will share with you in due course.<\/p>\n

This week\u2019s letter will deal with the problems of determining what GDP really is, and I\u2019ll throw in a few quick remarks on what the recent GDP revision means for the Fed and whether they\u2019ll raise rates.<\/p>\n

GDP is far from the rather exact number most people think. There are lots of ways to measure GDP; and recently, what is not<\/em> measured has been the cause for some controversy, at least among economists who care about such things. Given that second-quarter GDP was revised up substantially on Thursday to a surprisingly high 3.7%, it is even more appropriate to look at how that number is created. Bloomberg ran a short article pointing out that if you took the oil slump out, it was much higher still:<\/p>\n

The U.S. clocked its\u00a0fastest rate of economic growth in nine years. Well, at least if you\u00a0strip out the effects of a battered energy sector.<\/p>\n

Oil and exploration companies this year have cut back on investment in response to a plunge\u00a0in crude prices that gathered steam as 2014 drew to a close. If it weren’t for such a dramatic\u00a0reversal in demand for drilling rigs and wells, the economy would have posted its strongest pace of growth since the start of 2006.<\/p>\n

Gross domestic product, which includes what consumers, companies and governments spend and invest, increased at a 4.5 percent annualized rate in the second quarter when outlays for exploration, shafts and wells are excluded.<\/p>\n

Can that really be true? Even without taking out the oil industry, GDP growth this quarter was about as good as it gets these days. It gets even better when you realize that nominal GDP was 5.85%, with a 2.09% implicit price deflator.<\/p>\n

Let\u2019s review that for a second. Well above 3% growth, 2% inflation, the most popular measure of unemployment is down to 5%, and interest rates are still held to 0%? What is wrong with this picture?<\/p>\n

How in the name of holy righteous monetary policy can the Federal Reserve not raise rates at its next meeting? If they use the recent market turbulence as an excuse, they will lose all credibility as to being focused on monetary policy rather than looking at the stock market to determine what policy should be. They told us they wanted two percent inflation? Bingo \u2013 got it. Unemployment is moving in the right direction; and unless we get some disaster of an employment number in September (which doesn\u2019t appear very likely), we have to be as close to the sweet spot for an interest rate hike as the Fed has been in seven years. Truly, I can see no reason for a delay other than some very misguided understanding of how the economy works. This zero interest rate policy is creating all sorts of malinvestment and inappropriate financial behavior, and we need to begin to move towards normalization.<\/p>\n

A relevant thought comes from Mr. Yao Yudong, head of the People\u2019s Bank of China\u2019s Research Institute of Finance and Banking, who asserted recently that it\u2019s not China that is causing the current market chaos so much as it is the Federal Reserve generating confusion around whether it will \u201clift off.\u201d Further, he pointed out that the Chinese devaluation was very modest \u2013 only a few percentage points \u2013 and came after several years of strengthening of the renminbi.<\/p>\n

I suspect that much of the rest of the world agrees with him. It\u2019s quite easy to say that all problems are caused by someone else; but frankly, the Federal Reserve is the keystone of global monetary policy, and when there\u2019s confusion emitting from the FOMC, a little market turbulence here and there should be expected. In reality, though, the recent global market turbulence is undoubtably due to a combination of things.<\/p>\n

Whatever; let\u2019s just hope the Federal Reserve finds some backbone and raises rates, if only by 0.25%. If an economy growing at +3% \u2013 smack in the middle of the Fed\u2019s inflation target, with falling unemployment \u2013 can\u2019t handle a quarter-point raise in rates, then we\u2019re in sorry shape indeed. Now let\u2019s move on to the topic of how GDP gets calculated.<\/p>\n

<\/a>Weapons of Economic Misdirection<\/strong><\/p>\n

The problem we have today in economics is that many people, and not a few economists, seem to regard economics as \u201cpure science,\u201d as described above by Gauri Shankar Shrestha. If you delve deep into measurement theory, you find that all too often the way in which you measure something determines the results obtained from your experimental model. How you measure the effectiveness of a drug can sometimes determine whether it gets approved \u2013 apart from whether it actually does any good. The FDA actually works rather hard at measurement theory.<\/p>\n

To continue reading this article from Thoughts from the Frontline<\/strong><\/em> \u2013 a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics \u2013 please click here<\/a>.<\/p>\n

Important Disclosures<\/a><\/p>\n<\/div>\n

The article Thoughts from the Frontline: Weapons of Economic Misdirection<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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By John Mauldin \u201cMeasurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis. \u201cIn \u2018pure\u2019 science, we can form a better, more coherent, and objective picture […]<\/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-77680","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77680","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=77680"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77680\/revisions"}],"predecessor-version":[{"id":77681,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/77680\/revisions\/77681"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=77680"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=77680"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=77680"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}