My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “The saddest aspect of life right now is that science gathers knowledge faster than society gathers wisdom.” – Isaac Asimov
“The dismal science [economics] is in trouble, and it deserves to be in trouble. Economic axioms cannot be flouted without consequences—which means the central insights of the Austrian school will prove correct over the coming decades.”
How macroeconomics work is the subject for this week and part of the model is the concept of the Austrian’s approach to QE which is relatively recent.
“Virtually all Austrian economists, plus plenty of non-Austrians, loudly opposed QE from the start: new bank reserves don’t magically create new goods and services in the economy. Low interest rates discourage capital formation and encourage malinvestment. More debt is not the answer for too much debt. And why should banks, flush with QE reserves, lend at all in a shaky economy when (since 2008) the Fed pays them interest on those excess reserves? So here’s a modest proposal for the Federal Reserve officials, and a challenge to economists who reject Austrian views on QE and business cycles in general:
https://mises.org/wire/modest-proposal-fed
Here is the link to last week: Issue 56
Now that Brexit will not be coming to a conclusion for months yet after three years, I will continue to provide weekly updates as events progress:
Brexit Update – 21st June 2019
The Brexit deadline remains 31st October 2019 and stays in place unless the next PM can get Parliament to agree a new exit plan.
For this week we have the vote to pare down the candidates to a final two which now turn out to be Boris Johnson and Jeremy Hunt. They will battle it out at the hustings over the next four weeks until a final vote on 22nd July by all 160k members of the Conservative party who will choose the next party leader and Prime Minister.
Thus the progress of Brexit will be halted until a final decision is made and in the coming weeks I will report what the two candidates are saying about their ‘plans’ to execute Brexit by the end of October.
“One big controversy is the effects of a No Deal Brexit under WTO rules. Europe’s lead Brexit negotiator, Michel Barnier, has said that in the event of a no deal Brexit, the EU would refuse to begin trade negotiations with the UK until the three main issues covered by the Withdrawal Agreement—financial liabilities, citizens’ rights, and the Ireland-UK border—were settled.” https://fullfact.org/europe/boris-johnson-gatt-article-24/
Details of Parliament’s deliberations can be found here:
CHAPTER 11
MACROECONOMICS 101
“I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave”. – Joseph Campbell
“Gold and silver are not by nature money, but money is by nature gold and silver.” – Karl Marx
“When people find they can vote themselves money; that will herald the end of the republic” – Benjamin Franklin
The errors of economists in the 21st century
Economic theory in the 21st century has changed significantly from the early days of John Maynard Keynes and the Chicago School although the principles remain the same. Economists claim that their discipline is a ‘science’ but this is patently untrue because any valid science relies on the fundamental test: the ability for an experiment to be repeated anywhere at any time with the same results to be observed.
Clearly this is not possible for economic experiments, the outcome of which can only be classified as an hypothesis. The kind of simple supply-and-demand analysis that people learn in their Economics 101 courses, which economists call price theory, is no longer at the forefront of current academic thinking. A good book to learn about these early ideas is: “Economics in One Lesson” by Henry Hazlitt; he is a recognised and respected author of the basic principles of economic thinking which are no less valid today.
More complex economic ‘theories’ are now in the ascendant and these new theories often require a different intuition and result in very different conclusions. More importantly, the whole discipline of economics has shifted away from ‘theory’ and toward empirical studies using complex math and statistics.
Unfortunately this makes them no more valid and in many cases the practical, real world outcomes often exemplify the opposite of that intended. It will be appreciated that economics deals with systems and the failure of such systems to rectify errors has caused the general public to lose faith in economists and their politicians’ prognostications.
The adage: “people don’t fail, systems do” is all too well demonstrated in our dilemma where we are confronted with conflicting arguments from ‘economic experts’ who claim not only to know the future but to be able to control it! This is the ultimate error in economic academia which, like the weather, data may be observed and forecasts made but never is it possible for them to be controlled.
Unfortunately nobody appears to have mentioned this to the economists and exposed the error of their ways. Thus we continue to stumble from crisis to catastrophe, lost in the storm of unfathomable statistics and confused by outright lies.
How macroeconomics works
We need a new paradigm for this new era of ‘no growth’. Economies and the world have both changed, but public discussion is still too often based on the ideas of the 20th century. Having read the foregoing Chapters you will appreciate that much of the global financial system, of necessity, incorporates many facets of economics and politics in general.
Macroeconomists study aggregated indicators such as GDP (discussed in Chapter 5), unemployment rates, and price indexes to understand how the economy functions as a whole. Macroeconomists invent computer models in an effort to explain the relationship between the many variables such as: national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.
In contrast, microeconomics is primarily focused on the actions of individual agents, such as businesses and consumers, and how their behaviour determines prices and quantities in specific markets.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and an attempt to understand the determinants of long-run economic growth (increases in national income).
Macroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic and fiscal policy but which are often manipulated to goal-seek a favourable outcome.
Testing macroeconomic statistical models
For example: consumer spending in the USA accounts for approximately 70 percent of gross domestic product, although the way official GDP is calculated, it is highly suspect as a valid report on the net growth or otherwise of national income.
The rate of inflation is deducted (known as the deflator) from the value of all final goods and services produced in the economy’s total according to the formula:
GDP = C + I + G + NX: [less rate of inflation] viz:
- Overall national spending or demand, that is, private consumption (C),
- private investment (I),
- purchases of goods and services by the government (G),
- exports minus imports (net exports, NX).
If the rate of inflation is understated (which we have seen in Chapter 2 as with John Williams “Shadowstats” publication) and the true inflation rate is much higher than published clearly GDP would be lower than stated.
In fact, using more realistic numbers, it is likely that the USA economy has experienced actual negative growth ever since the financial crisis of 2008. Furthermore, in support of this proposition the USA has experienced a steep decline in manufacturing jobs over the past two decades and especially some 33% drop during 2001-10.
Another way government manipulates inflation is illustrated by this process: Prior to 1999 if a price of an item in an inflation measure rose, the inflation rate would rise by the price times the weight of the item in the index. Today, if a price of an item in an inflation measure rises, that item is removed from the index, and a lower cost item substituted in its place.
John Williams corrects for these dubious methods. John states in a recent report: “Decades of massaged reporting methodologies have distanced headline economic activity from common experience and underlying reality. When I started the Shadow Government Statistics newsletter in 2004, it reflected my formal experiences of assessing the quality and nature of headline economic reporting since the early 1980s, and of a broad recognition that Main Street U.S.A. had a good sense of underlying economic reality.”
However we must be cautious in accepting John Williams’s statistics at face value as much that I would wish to do so as he supports my own internal feelings about inflation generally.
There is another group that is working on measuring inflation using a ‘big-data’ methodology. The “Billion Prices Project” (BPP) described by the senior editor at ‘Financial Sense’ (financialsense.com) who interviewed MIT’s Roberto Rigobon, one of the two founders of the Billion Prices Project.
The goal is to use technology and real-time tracking methods to assess price level fluctuations, rather than rely on physical price-checking and a lot of complex statistics. By scouring high-frequency price data to the tune of more than a billion prices per week, the BPP is able to provide another view of inflation.
Tracking changes across billions of products has not only allowed the BPP to assess inflation trends across the globe, it has allowed them to pinpoint which countries are providing accurate official readings and which are not.
It transpires that the UK, USA, and Netherlands show the most accurate official readings, while places like Russia, Argentina and Venezuela show the least. Inflation will never be an exact science but a variety of measurement approaches by different organizations are all pointing to similar levels of inflation. The CPI, PCE, spread between Treasuries and TIPS, and now the BPP, all point to roughly 2% or sub 2% inflation.
To be continued next Saturday
Inflation might be 2% but not for well drilling. Fifteen years ago, I got a deep well for $2,500. Today, quotes for the exact same type well as a back-up costs about $7,000. The Economy climbs out of a ditch over years but gets shoved back into the ditch over a couple months. Trying to completely unwind the rape of Americans by the Bankster’s TARP over 10 years now would cause an Economic Heart Attack almost immediately and return US to 2009 conditions. The Fed kept rates level 8 years under Obama and then set the house on fire again by raising rates 9 times after Trump was elected. We have a choice of letting the Economy burn down under Trump and losing Congress to the Communist Democrats in Nov 2020 or lowering rates and kicking the can down Inflation Blvd and hoping it doesn’t become the “casus belli” for a Dollar Reset.
Thanks Robert and I cannot but agree that the choice is hobbesian at best. There is nothing to prevent the next GFC 2 arriving on time – but few will be prepared yet again.
22 trillion and climbing like a rocket. Does anyone believe that can be fixed?
None belive that it could be fixed, Overthe cliff, – none want it fixed – it is but virtual money anyway. It has no relationship to real values and thus can be safely ignored until the dollar comes under pressure when all hell will break loose.