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Too Much Faith Is Being Placed In Untested Theories
Submitted by Peter Tchir of TF Market Advisors,
A Pseudoscience Stuck in Place
I am growing more concerned by the day by the actions of the central banks. It isn’t just that markets popped and dropped dramatically before and after Draghi’s rate cut, or that any policy seems particularly bad, just that the policies don’t seem to be working great, and are leaving a changed landscape that will need to be corrected, somehow, in the future. I am quite simply concerned that too much faith is being placed in untested theories that may or may not work, or may or may not even be correct.
Here are a few things that concern me the most:
1. Central Bankers seem to rely on economic theories that have remained largely unchanged for years
2. Central Bankers seem of an age that they aren’t willing to incorporate theories that might change their favored models or might make those models too complex to be easily understood by those in charge (the Nobel prize committee has given out multiple awards for work in behavioral economics, yet central bank models seem to rely on pretty basic econometric models where behavior doesn’t rapidly change based on policies)
3. Central Bankers seem focused on domestic issues without really considering the ramifications and ripple effects that they potentially create
From Newton to Bohr
I liked Newtonian physics. I could do the math easily and it was intuitive. It was so easy that I took physics 101 right along with econ 101 because I needed some easy A’s.
But physics has changed. The relatively simple world of Newtonian physics turned out to be inadequate to explain what was needed to propel science forward. As comforting as it was to know that “each and every action has an equal and opposite reaction” that just doesn’t cut it in high end physics.
Personally, I started to lose interest and any real intuitive skills in physics around the time we learned that light is both a wave and a particle. The math was getting more complex, but I could muddle my way through that. What I lost was any instinctive or intuitive feel for what was being modeled. I tended to focus on areas that I felt comfortable with, hampering any potential for intellectual growth.
Quantum mechanics really revolutionized physics. It was a new paradigm and you either had to adapt, understand it, or get some intuitive feel because brute force math might be enough to be adequate in the field, but not enough to excel.
I wonder why economics hasn’t had its “quantum mechanics” moment?
Did Keynes and Hayek really discover all there is to know? Is Yellen’s beloved “Taylor rule” really the epitome of the “scientific” advancement of economics? I realize there have been advances, but most seem to be “more of the same”. No one seems to have challenged the central tenants of macroeconomics.
In physics, once Newtonian physics failed to explain the world, brilliant minds concocted experiments to test hypothesis. This is what led to quantum mechanics. The old theory was failing in that it couldn’t explain some observed phenomena, so it was ultimately supplanted by a new, much more complex theory, but one that explained much more of what was observable.
Why is that not happening in economics? Personally, I don’t think economics has done a great job in explaining the world, otherwise we shouldn’t have so many periods of boom and bust globally.
Maybe it is the inability to experiment? This is potentially a bigger issue than it seems at first. We do experiment in economics, but it is a small group of elite, and mostly collegial economists who get to experiment. Actually they get to put their beliefs into practice and then argue that the situation is better than if they hadn’t been allowed to implement their theories. While costs and access can stop scientific progress, there certainly was a time that it was more readily available. Hypothesis could be tested and failures catalogued and successes expanded on AND verified by repetition. This capability just doesn’t exist in macroeconomics. There are NO TWO economies that are identical except for the policies implemented.
Young professors could and did challenge the system in the hard sciences. It is probably no co-incidence that most scientific Nobel prizes are awarded for work “conceived of” when the person was in their 20’s and “performed” in their 30’s. That might be a generalization, but it isn’t entirely inaccurate.
Maybe economics is failing to attract good new people? There may be something to this. To some extent the economists that I know and respect the most (yes, I do like and respect some economists) had strong quantitative skills but an interest in business. The didn’t want to be a “math” geek and liked working with the “real world”. I am willing to make the conjecture that as computer science grew and the opportunities there grew, it was an even better match for many quantitative students who wanted something other than pure math, or physics, or chemistry, than economics. Maybe even as MBA’s started looking for more “quants” even more people who would be the new economists didn’t pursue that?
Or maybe economists just ignore their own? I have read a little about “behavioral economics”. My take is that it demonstrates that people don’t always do what would produce the best “expected outcome”. That the “rational man” that economic models are built on may not exist, and what is rational on a purely “economic” level might not be applicable on an overall evaluation. We tend to hate losses more than we like winning. How is that incorporated into the econometric global macro models used by the Fed? The Fed runs the treasury/dividend yield model. Yeehaw, except for the graphs that is nothing a good old fashioned HP12C couldn’t handle. Why aren’t we incorporating some new techniques? Maybe, because just like I hit the wall in physics at a certain point, the economists in charge have no interest in trying to incorporate things into their models that they don’t intuitively understand, might call into question their own body of “prestigious” work, and where quite frankly they might not have the technical expertise needed to incorporate them?
The Observer Effect. Science understands that the act of observation can actually impact whatever is being observed. Attempting to measure something affects the measurement. First, I question how that plays into anything that is a “survey” or that is “subjective” in the first place. How many purchasing managers hoping for better year-end bonuses say things are better than they are because they know their boss will like it, and at this point, they know the stock market will like it. What about the “household survey” for non farm payrolls that we will get tomorrow. Does it make a difference how you respond depending on your political party? Does it amaze you that we still conduct door to door surveys to figure out how many Americans are working? This is all a relatively minor effect, yet probably real, and as far as I can tell, largely ignored at the “policy” level.
Learned Behavior. Humans learn over time. We are pretty adept and maximizing return while minimizing risk. This is where I think economics does the worst job of integrating its own new theories. QE seems based on a pretty simplistic model. Provide more money, take risky investments out of the market, and the market will take that money and be encouraged to take more risk. It will create asset price inflation which will encourage further real risk taking. What if it turns out it is easier not to take the risk but end up with a pretty darn good reward? How many companies took risk and a lot better off for it? But how many have decided it is easier to do some financial engineering and let QE take care of their stock price? How is that accounted in the models? It probably isn’t and is probably too complicated, but we don’t try and predict the weather by licking our finger and sticking it in the air, yet economists seem in many ways content to run their policy on little more than that.
Equal and Opposite Reactions. Such a basic concept. It extends beyond science. If you punch someone in the face, you can reasonably expect a certain reaction. You might be able to qualify even that reaction based on the size and personality of the person you punch in the face. Then why don’t we seem to use that in economics? We live in a global economy apparently some of the time, but inflation is local wage driven only? Hmm. Bernanke, who claims protectionism was part of the problem with the Great Depression, basically told the Emerging Market countries (through lackey’s in Jackson Hole) that we will do what we need and they can worry about themselves. Draghi cut rates today. What does that to their currency? Does that help or hurt what we have been trying to work on? Central bankers all too often seem to act as though they are playing golf when the game is really chess.
Kasparov to Big Blue
Which brings us to chess.
Maybe the central bankers are aware that they are playing chess. Maybe Bernanke is aware that each of his moves will cause another move by his “opponent” which he will then have to react to. The problem is that if he is playing chess, and he is “thinking a few moves ahead” he is assuming too much, and making a classic mistake of expecting his opponent to fall into his “traps”
In the early days of “computer” chess, a modestly better than average human player could beat most computers after a few matches. That was because of how computers evaluated the chess board. There were far too many moves for a computer to analyze all the possibilities. So they used “heuristics” to “score” boards. They found ways to estimate how strong or weak a position was. They could then “truncate” paths that lead to weak positions and explore only “strong” paths. The trick was figuring out what the computer was doing incorrectly. To take it down a path that looked “strong” for several moves that could be then turned around. The computer literally “fell for the trap”.
But “Big Blue” changed that. It literally was so fast that it didn’t have to “truncate” paths early. It could play out 200 million positions in a second and ultimately beat Kasparov. That was back in 1997.
It was a sad day for many since it turned something that was elegant with a certain flair where imagination was respected and turned it into a brute force mechanical process.
I am not arguing that economics is something that is purely brute force, but I do think there are two lessons to be drawn from this:
1. Computer power and the evolution and development of computer power to analyze complex systems is useful and I am not sure we do enough of that, and
2. Don’t expect people to make the moves you want them to make, expect them to make the moves that they think are in their own best interest
That latter point is critical, especially as we now have rates at 0% in Europe, Japan, and the U.S. We have QE programs in the U.K., the U.S., and Japan. We have who knows what in China. But each of these actions is causing other actions that may actually be the reason nothing seems to be working as well as it should in theory.
Do companies and executives really respond to QE the way the models predict or is their reaction different? Maybe their reaction produces a better outcome for the company than the reaction the central bankers want and need out of those executives?
Too much of policy seems to assume certain moves will be made by other players when it is far from clear that those moves are either optimal for those other participants from their overall perspective.
As our balance sheet grows, as we create negative real rates, are we really sure we aren’t doing more harm than good, and what will the world look like 10 moves from now, or 50 moves or 100 moves?
Sadly, I don’t think anyone honestly knows.
What Does this Mean?
Mostly it lets me get this off my chest. Somehow this topic has been bothering me a lot lately so I feel better having written about it.
But on a serious note, I think it is another reason to scale back positions. Liquidity already seems abysmal, and this is a market largely supported by the faith that central bankers can continue to support it. It is circular because the central bankers do keep getting forced to support it. The longer this goes on, the greater the risk that we find that there is a problem, and that this “circularity” has been distorting values to the detriment of the economy and that the market loses this crucial element of support.
I find more and more people questioning the usefulness of central bank policy. While I can see that the most likely path is a continued grind higher/tighter/better, it seems to me that there is growing doubt that the policies are working and any shift away from a full on love affair with central bankers is likely to be disruptive in a negative way. I still think that is a low probability event, but that risk is growing and at this stage of the year, with so little liquidity, keeping risk low and even slightly bearish now is the right trade.
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Chess is a poor example, well, for many things. In chess you can't really cheat.
Physics might be an okay comparison to economics, but Science-types will tell you that they simply "discover" more details about it. Economy and all that involves people. They're messy. (And of course cheat & lie, posture & misdirect)
XOE
What would a master chess player say of Bitcoin?
Which by the way today is worth about 17 ounces of silver according to www.ounce.me 0_0
So how many people are actually exchanging their "bits" for silver? If bitcoin has so much real value, it will simply become another hyperinflationary force - "winning".
< fondles a few ounces of silver (physical, not digital) >
Can I interest you in some GLD dawg?
Re: chess.
It think the example he is trying to show, however, is the concept of multiple itterations of cause-n-effect in a system: chess moves. I do this, he does that. It seems that most people don't even attempt to "simulation game" their actions.
Well the writer of that article is obviously clueless.
He thinks central banking economics is some kind of 'science' with merely mistaken theories.
It does what it is designed to do . . . provide cover so they can steal peoples wealth.
(The black ink of the squid.)
In this it has been extremely successful.
This article is evidence of that. Now wipe the ink from your eyes.
I like how this dude thinks Bernanke is not on the same team with the other central bankers. As if they have not formed one cartel and have instructed the banks on what to do and what not to do. He is cute (giving him a nuggie and roughing up his hair)
be careful there fonzi, be very careful with this drivel:
or you will be banned like cheeky bastard, anonymous, joyful, ekm, francis and others for knowing too much..
"1. Central Bankers seem to rely on economic theories that have remained largely unchanged for years"
If your theories provide cover for the sucessful transfer of wealth to your owners, why would you change them?
Economics is a religion. Nothing more. And just as destructive.
The ISM's are just fantasies of the semi-autistics.
Exactly. Economists are the High Priests of Money, preaching an art that directly descends from alchemy. Money for nothing and chicks for free.
Exactly. Economists are the High Priests of Money, preaching an art that directly descends from alchemy. Money for nothing and chicks for free.
What garbage. Money is about power and control, period. Control the money and you control the resources (including the human kind).
I will further that.
There is no theory being employed. Those in power seek to stay in power. They are making this shit up as they go more than anything else.
The notion that there is any theory at all in play is a smokescreen. Nothing more.
The only thing going on here is the Dogma of greed.
Not at all... when their actions at the very least rhyme with numerous generations of predecessors, all across the globe, I'm not sure you can classify it as making shit up or that no theories are in play... rather, the theory is simple, punitively impose control from your position of power... eliminate competition... solidify your existence.
It's just that the traditional academic economic theories are ignored/useless because they don't actually measure how the world works (self interest)...
True. Money is power. Then what is currency?
Hey, Peter! Try this one on for size: EVERYTHING is based on the "theory" of perpetual growth on a finite planet. WTF are we forcing ourselves to test a totally discountable "theory?"
Ah, but you economics types will look past this as you poke at others who are impeding your ability to work the growth scam... folks like you are either totally fucking ignorant/clueless (while pretenting not to be), or are no better than those whom you are accusing of not being able to understand the "Big Picture."
Fucking pikers...
Its like wondering how many idiots we can cram into a VW or a phone booth. We just have to find out. lol.
I'd like to give a tip of my hat to all the folks that are here now posting on this thread. You all Get It!
Peter and his gang are no different than TPTB in their deception practices. Only difference is that Peter et al are looking to grab more crumbs.
I just hope the day of reckoning actually brings about real enlightenment (real truth).
Yow... so many words, so little substance.
Maybe the better correlation to to look at Newton's progression vs. real science (physics) and nonsense (economics).
Newton was an alchemist. He woke up one day and progressed from nonsense, that society disguised as real science, to real science.
Mr. Tchir wants to improve his nonsense (economics) with more nonsense (behavioural science) for what purpose? To disguise leadership choices as "science"?
Let's just stop disguising whims as "science".
Science is great as long as we don't selectively apply it. That is, ignoring the proven science that unlimited growth cannot take place within a finite environment while accepting all other science and expecting it to get us past that inconvenient part, does us, in the end, no good.
"Science" is understanding, the pursuit of.
"Techonology" is the application of science.
And tangilble stuff cannot happen without physical resources, without natural capital.
If you take in all of this then it becomes clear that "economics" is nothing more than a bad joke, as it has no basis in any reality: it might try to give the appearance of such, but only in so much as it allows for the intended goal of enabling mass deception.
Forget all this bullshit. It is a dangerous distraction. One more time. I don't accept the premise that the Fed's purpose is to apply any theory with the intent to repair or otherwise improve the economy. The Fed's purpose is to keep the wheels of our debt-based currency and fractional reserve-based banking system turning to the benefit of the owners of the system. In a dead economy, financializing everything in sight is part of that process, and this requires greater and greater liquidity which flows first through the owners banking establishments.
Bingo.
Run the system until organic growth is dying. Crank up the leverage like crack to keep the party going. When it rolls over, cram down debt. After that, the only thing left is economic cannibalism.
This is where we have been since 2009 sans the student debt bubble - which unlike previous bubbles that prey on greed, it preys on fear. Fear of a Hunger Games world as if a college degree is a ticket into into the fancy city where the rich people live. Fear of a binary outcome. Funny how even sheeple can instinctively "feel" the truth. They just can't deal with the truth. And they are the fuel that keeps the party going just a little bit longer.
Yup, there's no special actions happening, it's just more of the same. Only the "same" is increasingly running up against the finite.
"The secret plan is that we're going to keep doing exactly what we've been doing, for as long as we can."
- Daniel Quinn, in, "What a Way To Go"
And, really, does anyone have a better "plan?" Keeping in mind, of course, that there are a LOT of people that wouldn't buy the coming clean by TPTB even if it were real. And on this account I have no idea whether that's part of their "plan" or not, but clearly it can work against them.
Awesome post IMHO!
Untested theories and naive ideologies...
Ummm, we be fucked either way...
There's plenty of good theory out there. The problem is that it is ignored. In mathematics broad vistas have opened up with nonlinear dynamics and catastrophe theory. Steve Keen, for instance uses nonlinear dynamics to model economies, and he has been ignored by mainstream economists. Virtual experimentation is possible using simulation.
There's really no excuse for Bernanke, Yellen, Draghi, et al. One could allege that due to the horrendous consequences of their close-mindedness and intellectual backwardness, they are criminally negligent not to school themselves in these domains.
Regarding one the "hardest" of the hard-sciences [meaning mathematically well-defined not difficult, despite the extreme difficulty], quantum physics; probably its greatest teacher ever, Richard Feynman once said the following: "If you think you understand quantum mechanics, you don't understand quantum mechanics"!
And, that is what he said regarding just about the most-well-defined science we have. Economics is not even in the same ballpark. It is based, in part, on human psychology and behavior, which might just be too complex to be modeled precisely by the same creatures doing the modeling of themselves.
My economics model is much simpler. The politicians seem to continually create more fiscal constraints to the economy through increased costs of compliance with taxation, regulation, and litigation [so they can buy votes from the ignorant and become more powerful]; and then the Fed prints more money to temporarily postpone (and probably increase the severity of) the eventual economic constraints from being exhibited in the form of less jobs, less businesses, and less freedom for We the People.
The delay before feeling the new economic constraints, caused by the Fed, is to the liking of the politicians because, with a sufficient delay, they can more easily blame the disaster they created on others.
After things get bad enough, the politicians [who never let a crisis go to waste] use the bad conditions which they created, with the Fed's help, to radically transform the US again, seizing even more power. Then, repeat. And, don't kid yourself; the politicians can't do this alone. They first have to cronyistically corrupt many of the rest of us. [However, regarding banks, my theory starts to break down sort of like approaching the event-horizon of a black hole. I can't figure out if the banks corrupt the politicians more, if the politicians corrupt the banks more, or maybe some combination of both. It's really hard if not impossible to get much information out of that black hole. But anyway . . .]
It is just like how the disastrous failure of the [un]Affordable Care Act will be used as a pretense to change to "single-payer" [One has to love that ridiculous name for what should really be called commie-care. In single payer, doesn't the government own and control the means of production of healthcare? If so, doesn't that obviously meet the classical definition of "economic communism"? If nothing else can be made more affordable with that model, what is so special about healthcare (its extreme complexity sure doesn't help!)? If it's only one payer, why do so many of us have to pay the taxes for it, just so it can be even less efficient than if everyone just bought their own healthcare? Oh yeah, I forgot, it's so the politicians can become more powerful, not so healthcare can be more affordable.].
This is shocking if you think about it. Why would we ever turn to the same politicians who have systematically destroyed the best healthcare system in the world, and then expect them to fix it with single payer [commie-care]. If we are truly that delusional as an electorate, I guess we deserve the punishment we will receive.
And, this phenomena seems to be going on world-wide, not just in the US.
Didn't we learn anything about the whole reason why the founding fathers of the US fought the American Revolution in the first place? Did we learn nothing about the dangers of having governments be so powerful, cronyistic, and manipulating?
http://www.usgovernmentspending.com/spending_chart_1890_2013USp_15s2li01...
Here is another economics theory [fact] for you: politicians spending is proportional to their power which is proportional to their corruption.
I guess they don't teach very much of that kind of stuff any more in the big-government indoctrination centers otherwise known as K-12 public schools.
Re: called commie-care
You mean OldFart Commy-care?
Re; politicians spending is proportional to their power which is proportional to their corruption
I sure wish the "Conservatives" were as enthusiastic about cutting Big-Ag, Big-MIC, Big-Road, Big-Water, Big-Airport, Big-Energy, Big-House, Big-Fin, Big-OldFart, Big-OldFartHealthcare, Big-AntiDrug, & Big-PoliceState as they were about Amtrak and NPR all these years.
Funny how "Conservatives" love their manly Big-Gov as much as the "Liberals" love their girly Big-Gov. Why, it's almost like everybody loves free money but creates different bullshit about why it's not really socialism.
Trust me, NOTA, I would gladly cut it all. 'Every single bit. Just slow the rate of growth, of everything, across the board, one or two percent [per GDP].
You don't even have to cut nominal spending, to substantially, if not totally, fix most of these problems, in my opinion. For programs like Social Security (and more importantly, Medicare), you just have to make sure the cuts come from future retirees [like me] and not present retirees, who haven't already had time to prepare.
But, you know what? Achieving even this little teeny bit of more-sustainable-future for our children [instead of completely dooming them financially!] will be an enormous battle because it would actually dis-empower current and future politicians.
That is not an easy battle. If it were, we would likely already have passed the Fair Tax, given how superior it appears to be, compared to our current system in the US.
I am still of the opinion that the fundamental problem of economics is the quantification of money. Given a world in which there are but two debt notes, IOUs, or what you will, each of which is to the sum of 10 bananas, what is the total value of currency?
Answer: - there is no one simple answer, no objective procedure. Debt notes for example, can be added, or subtracted, contested, or counted multiple times as each passes hands. It is all a matter of interpretation.
The fundamental quantity of economics, money, is not an objective measure of anything. Even in the simplest world of two units of currency, there is no one obvious way of evaluating their sum. This is why trying to form higher maths over money is absurd.
Call me crazy.
But, I always thought that was the whole purpose of the "free-market": to determine the point of compromise between such opposite positions, or other such questions of just exactly where is the "measure".
Once, the "market" is removed [for whatever reason] it seems to become less efficient at helping people to fairly trade value between themselves.
Too bad. ['Unless we fix it.]
Just let us trade it all! ['Without a bunch of other obvious problems noted as having happened recently. Some stuff does have to be done properly, including some government being necessary.]
Pretty sure Hayek said that the Keynsian theories were fully tested and proven to be disasterously false in the early 1800s. Maybe the central bankers didn't get the memo.
Or maybe they are doing it anyway because it benefits them at the expense of everything and everyone else.
"I wonder why economics hasn’t had its 'quantum mechanics' moment?"
Because economics isn't a science. Theories which cannot be falsifed also cannot be proven. They are therefore only baseless superstitions. Not science.
Want some hard truth? Check this out: http://paulcraigroberts.org/2013/11/07/america-lost-paul-craig-roberts/
Re: Want some hard truth?
Good link.
Gee, with kasparov, famous russian mentioned, where is boris? I miss his mangling of english. Not like its real or anything.
Don't let the villain convince you he is simply guilty of incompetence.