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After the Taper: The Fed’s Non-Plan Is Unchanged

Tyler Durden's picture





 

Submitted by Frank Hollenbeck via the Ludwig von Mises Institute,

As an economist, it is getting more difficult to understand the logic underlying current monetary policy in the U.S. There are two main channels by which economists think monetary policy can influence growth and employment. The first is to lower interest rates to spur investment and consumption spending. The second is to induce inflation so real wages drop, spurring output and employment.

Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. You can bring a horse to water in a trough, pond, or lake, but you cannot make him drink. Most of the added liquidity has found its way into excess reserves. Banks are not lending because they have few creditworthy customers who want to borrow. The household sector is still deleveraging and has less appetite for more debt, and the business sector is careful about making future investments in a financial and economic environment on unstable footing. Businesses are keenly aware of the malinvestments never cleaned up after the last bubble and of the price distortions of current monetary policy. Why would businesses stick their necks out if they suspect a painful adjustment is around the corner?

Since the first channel has failed, only the second channel remains. Economists are generally in agreement, however, that there is no long-run trade-off between inflation and unemployment. The Keynesians and monetarists believe that there may be a short-run trade-off. If people have adaptive expectations, (based on the recent past) then monetary policy that creates inflation will reduce unemployment by lowering a worker’s real wages. Of course, once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary. If, instead, people base their expectations rationally and are not fooled, the neo-classical position, there is no short- or long-run trade-offs between inflation and unemployment.

In a capitalist economy, relative prices play a crucial role in sending information to producers about what society wants. When one price goes up and another goes down, these are signals that tell producers to make more of the first good and less of the second. It is a complex system of signals with price changes reflecting the urgency of the needs within the reality of the law of scarcity. The most important aspect of a price system is the information it conveys to guide production.

Inflation causes an “information extraction” problem. When all prices are going up by different degrees, it is very difficult for an entrepreneur to distinguish between a relative and an absolute price change. Is a rising price a reflection of greater demand or inflationary pressure? That is, does it reflect a society’s changing needs or simply reflects a changed measuring stick (i.e., the value of money)? The same information extraction problem holds true with the prices of resources and labor. We have different labor markets with a wage gradient established along the production process. The printing of money interferes with this wage gradient and the information it conveys about the right proportion of capital and consumption goods to produce. Overall employment may initially improve but the gain is not worth the cost from the adjustment that must occur once the printing stops.

Looking at historical evidence, inflation leads to higher, not lower, unemployment. This should not be surprising. Inflation is like a wrench thrown into the workings of a capitalist system.

If economists agree that there is no long-term trade-off between inflation and unemployment, and the current Fed strategy to lower interest rates has failed miserably to boost growth, then we must ask, why is the Fed, even after this week’s taper, in effect printing $75 billion a month? It’s likely the goal is to induce inflation for a short-term gain in employment. Things are no better if the Fed’s strategy is to raise asset prices to induce an imaginary wealth effect. Yet multiple bubbles may pop before any wealth effect takes place. The Fed should not be playing the economy as a stake in a poker game.

Through multiple bubbles, Alan Greenspan’s monetary policy was responsible for massive human suffering worldwide. Yet Greenspan is living high on the hog with a comfy government pension, spending his spare time penning op-ed articles and dispensing his expert advice on the lecture circuit. He informs us that he was only human and that no one saw the bubble coming. This is less than ingenuous. If you play with fire, and you burn down the forest, it is criminal to say “I did not realize that playing with matches was dangerous.” The sad situation is that we recently replaced him with even bigger arsonists!

One can be certain that interest rates will shoot up once inflation picks up. Since most of the U.S. debt is short term, it is going to be very difficult to inflate prices to reduce the real value of the debt. How will the U.S. government react if it has to refinance at interest rates of 12 percent or more, like in 1981? Yellen is no Volker; will she be able to tame the inflation beast as Volcker did? The independent German central bank was powerless to stop the German government from using the printing presses during 1921-23.

Napoleon and Hitler, both responsible for millions of deaths, rode to power on a wave of discontent that followed periods of excessive monetary printing. Why are we taking such risks?

 


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Sat, 12/21/2013 - 21:04 | Link to Comment fonzannoon
fonzannoon's picture

One can be certain interest rates will shoot up once inflation picks up.

I was so certain this was true 4 years ago. now i realize how simple minded I was.

Sat, 12/21/2013 - 21:17 | Link to Comment VD
VD's picture

the fed has a singular mandate: to enrich their PDs; they do this by blowing bubbles and popping them when good and ready: they milk the system on the way up and they milk it on the way down (even more so this next crash) all while capturing the gov and the debt-slave. nothing more to wonder about for economists or anyone else...

 

this last 'taper' is a pure headfake : it's cosmetic : they will crash this motherfucker 100% and throw in a war in Asia for good measure...

Sat, 12/21/2013 - 21:27 | Link to Comment Deo vindice
Deo vindice's picture

People have to realize that the Fed is not clueless. They have a plan. It is an evil plan, no doubt, but still a plan.

They only look like they are flailing about cluelessly to those who actually think the Fed holds the best interests of the U.S. and its citizens at heart.

The final sentence gives the clue, if only the author would read his own words.

Napoleon and Hitler, both responsible for millions of deaths, rode to power on" a wave of discontent that followed periods of excessive monetary pringting. Why are we taking such risks?"

"We" (i.e. the citizens) are not taking such risks. The Fed has made a conscious decision to print. And they know the result will be widespread civil unrest which will pave the way for the installation of a totalitarian regime to control it.

Sat, 12/21/2013 - 21:34 | Link to Comment VD
VD's picture

just think about it: dual phony mandates have zero to do with what they are targeting : QE is wealth extraction plain and simple ; the Fed's derivatives on their shadow books are illegal and raise their books well over the current 'official' $4.1 Trillion : the banks (1%) own the gov and the resources and as such own the populace. it's that simple.

Sun, 12/22/2013 - 07:40 | Link to Comment bozzy
bozzy's picture

pitchfork and dangle the lot - it is the only answer

Sun, 12/22/2013 - 08:51 | Link to Comment A82EBA
A82EBA's picture

at this point the only answer is to stack. then regroup after the fallout.

Sun, 12/22/2013 - 10:47 | Link to Comment DaddyO
DaddyO's picture

Did we miss the last sentence of the article?

It would seem at this point, the mile markers are screaming that WOAR is just ahead.

The overall tenor of the rhetoric has really ramped up the whole butt sniffing, postering meme of who's dominant.

Putin sticking his thumb in Obummer's eye all summer, China escalating the territorial issue with the world watching.

All these sign posts seem to be saying the same thing, have we not seen this type of devolution into WOAR in our history books, even the doctored ones?

A wise man looks ahead and sees danger, a fool rushes headlong to his demise.

Hedge accordingly...

DaddyO

Sun, 12/22/2013 - 07:36 | Link to Comment bozzy
bozzy's picture

all that recently purchased ammo....  1.8Bn rounds as I recall ...  this is the reason why, for it has not other purpose than to kill Americans in America.

Sun, 12/22/2013 - 07:43 | Link to Comment Obese-Redneck
Obese-Redneck's picture

Oh boy, sleep it off boozy,

Who cares, thank god that duck dick cornhole shit is off the air, 

and their cracker barrel shit too

Sun, 12/22/2013 - 10:40 | Link to Comment DaddyO
DaddyO's picture

Obese between the ears maybe...

My redneck friends would make short work of your fat ass.

Flay you and leave you to the vultures.

Maybe even spit a little beechnut in your eye.

DaddyO

Sun, 12/22/2013 - 08:48 | Link to Comment A82EBA
A82EBA's picture

Their job is to make decisions that keep their stock holders afloat. They were never put here to look out for you and me. And after 100 yrs we're still surprised by this. The sheep majority allowed Ron Paul to get sidelined. Elections Ignorance has consequences.

Sun, 12/22/2013 - 12:03 | Link to Comment rainingFrogs
rainingFrogs's picture

"People have to realize that the Fed is not clueless. They have a plan."

I think that is true.

Paul Craig Roberts offers an intriguing scenario:

“... looking ahead to the future, when the massive bank reserves that the banks have accumulated from the Fed’s quantitative easing -- roughly $3 trillion -- come into play, as the economy strengthens, and the banks start lending again to people, inflation could be a problem.

How is the Fed to deal with that?  If they (the banks) simply started selling bonds, or selling their portfolio, this could destabilize the system in some way because too much of a rise in interest rates would choke off the recovery.  So they (the Fed) were experimenting with a plan to use their portfolio of mortgage-backed financial instruments to do reverse repos in which they would pay the banks interest.  And in that way, stop them from lending their excess reserves and causing the money supply in circulation to grow.

Well, what that says is that the Fed is now going to be trading the market.  It (the Fed) is no longer a central bank.  In other words, the manipulations are becoming part of the system.  The New York Fed is going to be a big market player, dealing with a massive portfolio to affect the supply of credit and the prices of financial instruments."

Its clear the Fed is able to and is causing massive distortions in global financial markets. What if the US Govt is tooling up for economic warfare? Jim Rickards was involved in war-gaming on economic scenarios with the Pentagon and the CIA. So clearly they have been thinking about it for some time.

With trillions of US dollars (and USTs) sloshing around the global economy, the NSA apparantly able to manipulate individual bank accounts and probably trading accounts, massive global surveillance and the most powerful fighting machine on the earth, why wouldn't the US be gearing up to take Imperial Amerika to the next level. 

Honestly, I find this all very frightening.

... or they are bumbling incompetents.

Sat, 12/21/2013 - 23:50 | Link to Comment ZH Snob
ZH Snob's picture

I used to care, but things have changed.

Sat, 12/21/2013 - 21:08 | Link to Comment Fix It Again Timmy
Fix It Again Timmy's picture

People, ideas, innovations, machines, raw materials, energy, perseverance, dedication, the unwillingness to give up - these all are part of the productive economy.  The Fed and Taxes are immense drags on the productive economy.  The Fed is a one-trick pony that destroys the productive economy and it should be struck down....

Sat, 12/21/2013 - 21:30 | Link to Comment Deo vindice
Deo vindice's picture

Mr. Hollenback just doesn't get it. When he opens with the sentence: "As an economist, it is getting more difficult to understand the logic underlying current monetary policy in the U.S" he is trying to apply his logic to that of the central bankers.

They are at cross-purposes. You cannot understand the 'logic' of a thief if you think like an honest person.

Sat, 12/21/2013 - 23:53 | Link to Comment brettd
brettd's picture

It's not theft if you convince 

another person to hand you their money....

Sun, 12/22/2013 - 01:18 | Link to Comment Deo vindice
Deo vindice's picture

Actually it is. If I tell you a lie in order to convince you to 'give' me what you otherwise would not, now I am guilty of two sins: theft AND lying.

One is a thief. The other one is a lying thief - but still a thief.

Sun, 12/22/2013 - 08:54 | Link to Comment A82EBA
A82EBA's picture

Fool me once..

Sat, 12/21/2013 - 21:25 | Link to Comment TrustWho
TrustWho's picture

I have been saying for years that deflation is less destabilizing than HIGH inflation, because rich and poor suffer together. Japan has been fighting inflation for over 20 years and USA for over 5 years with NO SUCCESS. These PhD economist have proven they do not know what they are doing, except we can all agree they are playing with fire with their printing. The USA Senate should be making Yellen's confirmation VERY uncomfortable, but they are just complicit. 

History is warning, but no one in power cares...

Napoleon and Hitler, both responsible for millions of deaths, rode to power on a wave of discontent that followed periods of excessive monetary printing. Why are we taking such risks?

Sun, 12/22/2013 - 12:36 | Link to Comment Kayman
Kayman's picture

"HIGH inflation, because rich and poor suffer together."

If the rich get newly conjured up FRN's prior to general inflation, you're saying they suffer the same as middle class/poor who see these dollars trickling down to them as inflation is ramping up on basic goods ?

The rich, in general, get to position themselves years in advance of the average joe, who is clueless about his criminal masters dirty deeds.

Rethink.

Sun, 12/22/2013 - 17:56 | Link to Comment Exponere Mendaces
Exponere Mendaces's picture

@TrustWho

Precisely. The ones that bang the "deflation is bad" gong tend to be the sheltered Economists, who haven't worked a real job in their lives. Usually they point to the history of the USA when they experienced some mild deflation, with a larger outlier during the time cotton prices slid.

But they keep hawking inflationary policies as "the answer", even though the "deflationary death spiral" hasn't ever happened, and is debated fiercely that it even COULD occur. That's why I can't take people seriously when they bring it up versus Bitcoin, because simply nobody has really TRIED before.

I think we'll find out that controlled deflation helps the end-user, not so much the parasitical intermediaries like the current system. Looking forward to their collective disbelief when none of their gloomy predictions turn out like they think it would regarding deflation in general.

 

Sat, 12/21/2013 - 21:29 | Link to Comment Reaper
Reaper's picture

Many economists, Fed officers and their ilk want to believe or fool you to believe that their economics is scientific. In science, a theory is tested and accepted as long as it continues to predict outcomes correctly. In Fed economics, when the theory fails to predict outcomes, the Fed economists continue with it, hoping and promising that eventually things will change in the right direction. The Fed and its apologist economists practice an art of deception. You listen to their words and gestures, while the cash comes out of your pocket and into their cronies' pockets.

Sun, 12/22/2013 - 10:01 | Link to Comment Debugas
Debugas's picture

when sombody wants to loot you he will not tell you the truth even if he understands the truth :)

it is simply not in their interest to reveal the truth

Sat, 12/21/2013 - 21:31 | Link to Comment Wilcox1
Wilcox1's picture

Yer missin' th point.  See the Brandon Smith post above for clarification

Sun, 12/22/2013 - 12:52 | Link to Comment Kayman
Kayman's picture

Actually, let's talk economics about the article.

1.  In the classic trade-off between capital and labor, when you reduce the cost of capital through Fed manipulation of interest rates and credit/money, then labor becomes relatively more expensive. Ergo unemployment will tend to rise as capital is substituted for labor. Even if investment in real production ever occurred (and most newly printed money is sloshing around in the financial markets inflating assets) most businesses invest to reduce their labor component.

2. In economics, savings are only "bad" where they are not re-invested. Old people that have saved all their lives do not have interest income anymore to spend in the consumer economy. Ergo, the Fed is killing GDP growth and the weakest sector of our society.

3. And the article is bang on with business investment. Most businesses are not going to let another 2008 happen.  Caterpillar and McDonald's likely don't want to have to go to the Fed to make their payrolls (again). So Greenspan and Bernanke have created an instability factor that will last at least a generation, generally depressing real investment in productive assets.

Sat, 12/21/2013 - 21:34 | Link to Comment Miffed Microbio...
Miffed Microbiologist's picture

"once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary"

Um, I'm sorry but this ain't happening today. The reception of this would be as it was for the request " Please sir, can I have more gruel?"

Miffed;-)

Sat, 12/21/2013 - 22:28 | Link to Comment Yen Cross
Yen Cross's picture

 The last "Pool of Fools" economists batted in the mid 30 percentile of "taper expectatons".

Sat, 12/21/2013 - 22:51 | Link to Comment max2205
max2205's picture

Why doesn't someone just say the Fed is letting banks steal interest from every American saver...huh

Sun, 12/22/2013 - 04:11 | Link to Comment Teknopagan
Teknopagan's picture

zero interest rates are an additional bail in from depositors

Sun, 12/22/2013 - 08:01 | Link to Comment bozzy
bozzy's picture

OK here it comes: The Fed is stealing and impoverishing every saver IN THE WESTERN WORLD - ZIRP started in Bernanke's toxic gob, but all others had to follow: for such is the nature of competitive crrency devaluation, the main weapon of a weak, broke and cornered administration throughout modern history, and further back too.

That is the privilege of the largest economy and the reserve currency, the petro-dollar, 700 military bases, and a state machine (Not in the analystical sense) which overshadows any real economic activity that remains, and a century of ruthless systematic exploitation.

Sun, 12/22/2013 - 09:08 | Link to Comment A82EBA
A82EBA's picture

thats OK, when China gets all the gold we'll have a new set of problems.

Sun, 12/22/2013 - 09:33 | Link to Comment kenezen
kenezen's picture

Good Post! They do aim to become the world's Reserve Currency! The word is They think they need 8500 Tons

Sun, 12/22/2013 - 09:57 | Link to Comment A82EBA
A82EBA's picture

then, like Turd asked, would they favor a high price or a low price? the word is they have 12k- 15k tons

Sun, 12/22/2013 - 01:20 | Link to Comment JailBanksters
JailBanksters's picture

I'm not a Financial whiz-kid so most of this I don't get.

What I do get is: the banks can create as much money as they need to buy up assets at zero interest, and you can't, you actually have to work to EARN money.

All the other policies don't really matter.

Sun, 12/22/2013 - 08:02 | Link to Comment bozzy
bozzy's picture

jailing will not do the trick.

 

FORK AND DANGLE !

Sun, 12/22/2013 - 08:28 | Link to Comment A82EBA
A82EBA's picture

you see the words federal reserve note on your dollar bills? for the last 100 yrs, by not taking action, we've chosen to play their game by their rules trading our labor for their currency knowing they can devalue our purchasing power at will.

Sun, 12/22/2013 - 07:54 | Link to Comment eddiebe
eddiebe's picture

"Why are we taking such risks? 

 

We the people are taking those risks because our masters make us take those risks. Our masters make us do it because it suits them to stay in power.

Sun, 12/22/2013 - 08:18 | Link to Comment A82EBA
A82EBA's picture

Your masters cant force you to save the fruits of your labor in the form of fiat sitting in their vaults as an unsecured loan to them. Savers have had 5 yrs to figure out that hard assets arent as easily stolen. You have the choice not to participate.

Sun, 12/22/2013 - 08:00 | Link to Comment 29.5 hours
29.5 hours's picture

 

 

Now for a contrarian point of view--from Dick Bove, who is reportedly in failing health because of his worry about the bad rap banks are getting.

 

"Bove argues the crisis was not unique, and certainly not the fault of reckless financiers. “They are prized Americans,” he writes on the book’s dedication page. What’s more, Bove says, to maintain the U.S.’s dominance in the global financial markets, the country needs not just big banks but bigger banks"

Richard Bove Defends Too-Big-to-Fail Banks

 


 

 

Sun, 12/22/2013 - 08:39 | Link to Comment bozzy
bozzy's picture

If the man Bove truly said this he is the enemy of ordinary Americans, who are stunned and amazed by the absurd deceptions their administrations have undertaken to achieve "global dominance" - not my phrase but that of their own CIA bosses.

He goes near the top of my fork and dangle list. (Bernanke remains top by some distance because he is the unelected POS who unlaterally decided to steal from a generation of savers).

Sun, 12/22/2013 - 09:01 | Link to Comment A82EBA
A82EBA's picture

you mean 'dumb' savers,,smart savers dont allow counter-party risk

Sun, 12/22/2013 - 12:59 | Link to Comment Kayman
Kayman's picture

I liked Dick Bove's first book better: "Dick Bove defends Cancer"

Sun, 12/22/2013 - 08:01 | Link to Comment eddiebe
eddiebe's picture

Sorry to say: The author is an educated fool.

Sun, 12/22/2013 - 08:31 | Link to Comment eddiebe
eddiebe's picture

For the majority of people it takes a disaster to look at reality, let alone see it.

Sun, 12/22/2013 - 13:21 | Link to Comment DaddyO
DaddyO's picture

I've said it many times here on the Hedge, normalcy bias is a bitch, bitchez!

DaddyO

Sun, 12/22/2013 - 09:26 | Link to Comment kenezen
kenezen's picture

What a Great Article!! Well defined in terms of monetary policy and the reaction there-to. I worry however, from a more non-monetary stand-point. We have political structure that continues to threaten true Capitalistic Recovery. Only a massive change in the Bureaucratic structure of the Federal Government allowing and promoting a return of heavy Manufacturing Industry will be successful. We now have 50 years of slow but inevitable proof. The primary actors in this divergence has been First and foremost, the flattening proof of blue collar wage beginning in the very late 1960's and getting readily apparent in the 70's.

Industry moved from America initially because of divergence geographically and lower wage. Today, if one bothers to really search the reasons why Industry goes to Mexico as GM GE, Honeywell Goodrich and many other heavy industries have very recently, they find different reasons.

EPA with impossible Carbon emission standards for heavy industry, NLRB partnered with legal firms offering unheard of Class Action law suites, and finally such rigid control of States actions by the Justice Department and Central Government Agencies make it almost impossible. Assembly Yes! But, not heavy industry that grew our Nation, that hired our children from High School, that created the greatest Capitalistic nation on Earth. 

The question is are we Capitalistic Now? Let's debate! hedgemastermb.blogspot.com     

Sun, 12/22/2013 - 09:43 | Link to Comment falak pema
falak pema's picture

...One can be certain that interest rates will shoot up once inflation picks up. Since most of the U.S. debt is short term, it is going to be very difficult to inflate prices to reduce the real value of the debt...

The key phrase in this post. If operation twist has converted longer term debt denominated with higher yields into short term debt denominated with ZIRP yields, to allow the QE print to feed the banks; increasing their spreads and making derivative bread like bandits; its at the expense of more renewable tranches of ST debt, which is an explosive minefield  not only for derivative carry plays but for liquidity pumping to debase debt. Can't have both!

Its truly system checkmate down the road. 

Sun, 12/22/2013 - 09:58 | Link to Comment Debugas
Debugas's picture

it is easy to inflate prices by simply giving money away for free (food-stamps anyone?) but it is the Congress not the Fed who can do that

Sun, 12/22/2013 - 11:10 | Link to Comment falak pema
falak pema's picture

that is what the french socialists are doing by subsidising youth jobs for unemployed; the idea being it stimulates consumption and generates more trickle down tax and feeds local corporates invesment. Better to give "free money" to young unemployed than to the banks. However it does NADA to the structural problem of government debt except make it worse. Only REAL growth based on productivity and  innovation can solve that...and Dat! ....

But both private (immensely so, with shadow banking soup) and public (close to 90% gdp in first world overall), is so high, these governments will only have one solution down the road: massive bail ins. PArty over Oligarchs! 

Sun, 12/22/2013 - 13:58 | Link to Comment Marco
Marco's picture

How much more real growth can our Earth sustain? Consumption has to keep pace with productivity if we are to have full employment. Between peak everything and trade imbalances traditional economics is a fucking joke ... the math behind them fails to take any of these into account. The philips curve being wrong for a given historical dataset is irrelevant, the underlying necessities for economic growth from the past are gone any way.

Historically based economics is retarded, unless there is some miracle energy breakthrough. In the mean time all there is is kicking the can.

Sun, 12/22/2013 - 09:43 | Link to Comment Chief Kessler
Chief Kessler's picture

EPA carbon emissions, BULLSHIT,

Sun, 12/22/2013 - 09:46 | Link to Comment Debugas
Debugas's picture

clueless economists were learning economics from clueless authors

Let's teach them some basics

1) lower interest rates do NOT spur investment and consumption if the consumer can not afford to borrow more.

2) to induce inflation (we talking consumer goods inflation here) one has to increase nominal wages or give money away for free (not lend but give away). But the Fed has no mandate to do that

Sun, 12/22/2013 - 09:58 | Link to Comment rsnoble
rsnoble's picture

Well if the other article on ZH is true....the one quoting the CFR bitch and the Fed's intentions......that would lay all this guys opinions and concerns to rest wouldn't it?  I'm really, really tired of the bullshit.

Sun, 12/22/2013 - 10:35 | Link to Comment czarangelus
czarangelus's picture

I hate the stock market. By that I mean the big ones, the ones worth manipulating so the government does. The DOW, the S&P; you know, the big ones. The San Francisco stock exchange (yes, it does exist) just doesn't have the market cap to be worth the trouble so this rant doesn't apply.

The market is raw, unfiltered evil. In a world where the natural order of things can be described as the Tao, this is the most unTao-like thing imaginabe. It goes against all the cognitively applicable order that we use to relate to the rest of the cosmos.

The behavior of the market under Fed manipulation is so bizarre, so otherwordly, that it triggers my human xenophobia reflex. I hate it with all the passionate horror that the residents of the village would feel towards Frankstein's monster. The market is an eldritch thing, insane, violating the harmony of the cosmos with its very existence. The thing is a vehicle for greed, yes. An instrument of mass fraud. But it's more than that. It is an abomination.

Sun, 12/22/2013 - 13:10 | Link to Comment Pareto
Pareto's picture

The Volker FED, following the Lucas Critique (1976) was, in my opinion, an unequivical demonstration that the Phillips Curve simply doesn't exist.  In an effort to demonstrate an American fit to the Phillips Curve, even Samuelson & Solow (1960) among many others could not report a discernable downward sloping relationshipe between inflation (wages and unemployment).  Others still, like Salerno (2002), Mulligan (2011), Ravier (2013), Lucas & Sargent (1978), and this article have provided even further evidence that if there is any relationship at all between the two variables, it is more apt to be upward sloping!  In fact as Hussman (2011) argued here at ZH not long ago "Will the Real Phillips Curve Please Stand up?", that the Phillips curve crafted by none other than A.W. Phillips (1958) was at best: (1) a weak proxy for a downward sloping relationship, and (2) that its existence can only be explained under special circumstances; special circumstances, according to Hussman, that the Phillips Curve is really predicated on the existence of the gold standard, where real wages rather than nominal matter when mapping the infamous downward sloping Phillips Curve.  And yet the home page of the FED is still chasing 6.5% U and 2% inflation, or, at least it was when I viewed it in April 2013.  Our discipline (economics) has learned nothing.  We have become a dogmatic and I would submit, a stubbornly ignorant class of arrogant mathematicians that continue to try and make chicken salad out of chicken shit.  We suffer from the Ricardian Vice of holding 99% of the world constant, just to make a point, or, a model work without any credible reference to what is actually happening in the real world.

One of my colleagues of mine had wrote to me recently "Add the Philips Curve to a long litany of misinterpreted concepts/relationships propagated by economists.  Coase Theorem, Indifference Curves, Social Cost, Social Welfare Function, markets as structures, market power, inflation, labour theory of value, etc.", suggesting we ought to design a series of lectures or a course on how economists continually get it wrong.  To which another colleague replied, "1 course on how economists get it wrong? Try a whole series of courses- it might be its own degree.  The fatal conceit you are both committing is assuming economists are actually trying to get it right in the first place. An academic economists only job is only to impress other economists. It is not about, nor do they get rewarded for, being right.  They get rewarded by getting other economists to publish their work.  But, not to worry - I just financed a 2014 dodge ram 1500. When the apocalypse hits we will be driving around stealing silver from people in style!"

Stealing silver in style aside, both colleagues demonstrate a sort of universality of intertemporal preferences that cannot be captured or defined appropriately in convenient mathematical structures that can have any credible or predictive results - a result in and of itself I thought Lucas had demonstrated 36 years ago.  But we flog them anyways.  Like Bernanke's 6.5 and 2 - like Volker's 6 and 5 - like Greespan's derivatives as a truely remarkable innovation to the mitigation of risk.  Indeed the fatal conceit is to continue to embark on asinine policies that have no basis in the real world.  Our discipline (economics), in my opinion, has become virtually irrelevant.  

Sun, 12/22/2013 - 13:24 | Link to Comment frank H
frank H's picture

What a great post!

Sun, 12/22/2013 - 16:11 | Link to Comment PlausibleDenial
PlausibleDenial's picture

Yves offers the same meme in her book "eCONned".  All of it a bit above my level, but she does offer an insight to the unending desire of economists to consider their work more in the scientific realm.  In my little mind, I just remember LTCM. That's enough for this boy to figure it out.

Sun, 12/22/2013 - 13:14 | Link to Comment Herdee
Herdee's picture

In my opinion,The United States Intelligence Services across the board should be taking seriously this idea that a criminal syndicate of international banking cartels has put The Government of The United States in peril.The goal of course is to turn The United States into a "has-bin" or a "modern third world country".It seems obvious to all of us that the bansters control the politicians so does that mean that those that are supposed to defend The United States are helpless and simply stand by and watch these crooks while the whole economy is literally gutted?I've always said that the war being waged against The United States is an economic war and this international banking cartel that is even bigger than any Government and any ally of Governments can at it's own will control the United States and it's peoples lives through economic destruction.It's about time that these Intelligence Agencies stopped spying on the American people and started using their technologies to concentrate on the politicians and banksters who are destroying The United States.They're serving the wrong "people".

Sun, 12/22/2013 - 13:22 | Link to Comment DaddyO
DaddyO's picture

And what if the The United States Intelligence Services across the board are allegiant to a criminal syndicate of international banking cartels?

Kinda changes the flavor of your post a little, eh?

DaddyO

Sun, 12/22/2013 - 15:45 | Link to Comment moneybots
moneybots's picture

"Looking at historical evidence, inflation leads to higher, not lower, unemployment."

 

Define leads to.

In 1979 unemployment was lower than it is now.  Fighting inflation, lead to 10% unemployment in 1983.

 

Sun, 12/22/2013 - 16:13 | Link to Comment moneybots
moneybots's picture

"Napoleon and Hitler, both responsible for millions of deaths, rode to power on a wave of discontent that followed periods of excessive monetary printing. Why are we taking such risks?"

 

The law of the cycle is an up phase, followed by a down phase.

Reagan ran huge deficits, then a republican congress hounded Clinton to balance the budget.  Bush had a republican congress and deficits soared.  Cheney said deficits didn't matter.  Under Obama, suddenly deficits matter to republicans again.  It is all a game for political advantage.

Neither political party is interested in doing the right thing.

Greenspan was known as The Maestro when he pumped the money supply.  Bernanke is known as the one who saved us from another Great Depression, by pumping the money supply.  There would be great consternation if Bernanke stopped QE and raised rates to normal levels.  Kick the can as many times as possible, to push off the day of discontent.

Sun, 12/22/2013 - 20:26 | Link to Comment Playtime's Over
Playtime's Over's picture

Whatever.....here's all you need to know.  Republican's bad, Democrats worse.  Bush=frying pan.  Obama=fire.  I'll take an R over D whenever and someday we might get a real choice.   But I won't be equating any of them.

Mon, 12/23/2013 - 12:10 | Link to Comment dadichris
dadichris's picture

i'll vote for anyone that runs on a sound money platform.  IMO all others are traitors

Sun, 12/22/2013 - 20:23 | Link to Comment Playtime's Over
Playtime's Over's picture

Through Kensian,"or worse" colored glasses.......troll.

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