Dear rss free blog,
Time‘s
‘Man of the Year’, Ben Bernanke yesterday had the Federal Open Market
Committee state that “with substantial resource slack likely to
continue to dampen cost pressures and with longer term Inflation
expectations stable, the Committee expects that inflation will remain
subdued for some time” and will keep the fed funds rate at 0 to ¼
percent”.
The
helicopter man continues to fly around distributing cash. The
punchbowl remains in place because the party hasn’t got going yet (to
paraphrase William McChesney Martin’s famous remark that the role of
the Fed is to remove the punchbowl just as the party gets going. He
held Bernanke’s job in the 1950s.)
To
quote analyst Tom McClellan, “The Fed did its thing wihich is to
say that it did nothing, and it promised not to do anything for ‘an
extended period.’” (He writes the McClellan Oscillator.)
So
what’s with our central bank? Haven’t they noticed that the price of
gold, while marginally lower in recent days, is still in the
quadruple digits? Haven’t they spotted the steepness of the yield
curve in treasuries? When gold goes up, when longer-term 10-yr bonds
command a much higher interest rate than shot, based on part
experience, this is supposed to be a harbinger of inflation.
Maybe
the Fed is moving away from the anti-Keynes economic theology of the
past decades, dominated by what I call economeretricians. These
fellows believe that free markets setting prices as they go somehow
can predict future prices, and get them right. This pricing process
feeds through into supply and demand and the growth of the economy.
The
job of regulators, they preached, was to get out of the way.
Government was supposed to deregulate to liberate the price discovery
process.
Of
course the current crisis undermined the marketeers’ self-confidence.
If prices sink with a great thud for reasons their theories cannot
explain, the prices may not be generated without bubbles and biases.
And the prices therefore may not be a reliable leading indicator
after all.
I
think our Fed is now acting on that skepticism. Bravo.
As
long as banks are not lending, people are not spending, housing is in
the dumps, and jobs are scarce, the Fed is continuing the basic
stimulus of cheap interest rates despite a promised phase-out of
measures to actually purchase debt.
I
think that Ben Bernanke is reverting to his roots as a specialist in
what went wrong in the 1930s. Then central banks turned the spigots
off way too soon, plunging the world back into financial crisis. The
same thing happened when Japan went into a tailspin, when its CB
removed the stimulus before the recovery was established.
Would a former MIT student of the late Paul Samuelson like
Bernanke go so far as to drop overly mathematical predictive
macroeconomics which fails to properly work out the odds on unpredictable events? These are called “fat tails” by economists
obsessing over statistical bell curves, or “black swans” by
Nicolas Taieb.
Pre-crisis
“risk management” (a misnomer) ignored fat tails and black swans,
and used the benign climate of the recent past to assume that there
would be no blow-ups in the future. Such statistical exercises were
another example of ideology getting in the way of analysis, of
inadequate predictions, of misleading indicators.
Maybe
Bernanke should declare himself a classic Keynesian rather than a
neo-Keynesian or a neo-classic economist. That would be what the
latest Robert Skidelsky book about Lord Keynes would favor.
It
is one way to get away from the worst element of macroeconomic
silliness of recent years, making predictions using ‘the ergotic
axiom’ (from the word ‘ergo’, therefore, as in post hoc ergo propter
hoc). It means that the outcome at any future date is a statistical
shadow of past and present market prices. The term is from a real
classic Keynesian, Paul Davidson.
And
now you know why I am not producing predictions for the markets in
2010. Except to say I want the ballast of yield; and I am worried
about the likelihood of further rises in gold and material prices.
I
am leaving before the crack of dawn tomorrow for Manaus (on the
Amazon in Brazil) via Miami. We will board a liner to sail down the
great river to Santarém on the Atlantic before turning left for
French Guyana and Devil’s Island. Then we sail to Franco-Dutch St.
Barts, shopper’s heaven St. Thomas VI, and Fort Lauderdale. I will be
back Jan. 4.
Like
the ostrich mansions we visited in South Africa last summer, the
Amazon city became enormously wealthy because of a commodity
extracted from local trees: rubber. The river port was graced with
what every 19th century nouveau riche requires, a
cast-iron opera house, built by Eiffel and taken to Brazil by water. Melba and Caruso sang in this pink palace.
Henry
Ford, for his tires, bought vast acres to create Fordlândia.
But
the perfidious British then gathered up rubber tree seeds and planted
them in Kew Gardens in London. They flourished and we shipped out to
what was then Malayia. And the Brazilian monopoly was ended along
with Manaus’s prosperity.
Was
this a black swan event? Actually looking back it seems to have been
inevitable.
