Central Planning Update (In Theory And Practice) - You Are Here

Tyler Durden's picture

Submitted by Jeffrey Snider of Atlantic Capital Management

Volatility Is The Price Of Real Progress

As we all ponder what may come at us in 2012, the ongoing volatility in almost every corner of every marketplace is certainly concerning, as it should be.  This record volatility has enormous implications for any investor, but especially those in leveraged ETF’s.  Volatility is the anathema to these vehicles, as has been well discussed, but that does not diminish their targeted usefulness.

As a portfolio manager I use leveraged inverse ETF’s as hedges against the dramatic downside.  They have a very narrow window and only perform when the market more or less moves in a straight-line down – just as it did in early October 2008, May 2010 or July/August 2011.  Other than those sustained sell-offs, they are a drag on portfolio performance, a cost of doing business in this risk-on, risk-off “marketplace”. 

I willingly pay that cost because I have no concrete idea when another fit of sustained selling will actually take place, but I have more than an inkling that it will.  Instead, this massive and growing volatility, even though it is costing me some short-term performance, is a good sign that there is actually progress being made.  What we are witnessing is a titanic battle between the world as it really is and the one central banks need you to believe it might be (if only you would set aside your own perceptions and self-interest).  The fact that volatility has risen is a clear indication that the central bank-inspired anesthesia is no longer as effective as it was in 2009, or even in the QE 2.0 inspired insanity of 2010.  Reality, and the free market, is being imposed – and that means there is a place for even narrowly-useful hedging vehicles.

The current market battle is nothing more than the extreme measures of the rational expectations theory and a form of the fallacy of composition, combined with the political aspirations of a century-old theoretical notion of how the economic system should be ordered.  Mainstream economic “science” has developed in a relatively straight line since the Great Depression, starting with the idea that the economy must be governed in emergencies.  Executive Order 6102 and the subsequent devaluation of the dollar solidified the place for the entire field of economic management, marking perhaps the last time it would be challenged by mainstream thought.

Without the guiding hand of the educated economist, capitalist, free market economies are believed to be wrought with the danger of total collapse, unable to escape from their own emotional whimsies.  At the most primal level of modern economics is a deathly fear of deflation, a fear that is best summed up by Fisher’s paradox.

In 1933, Irving Fisher published a paper in the Federal Reserve’s Econometrica circular that amounted to a point-by-point logical deduction of the string of events that led to the unusual collapse of the economic and banking systems.  The scale and pace of the disaster confounded “experts” of the era (it seems experts have trouble with inflections in every era), so his deduction offered a highly plausible, well-reasoned and “logical” explanation. 

For Fisher, the combination of over-indebtedness and deflation was the toxic mix from which the calamity grew.  But within that mix lay a paradox that formed a trap by which no self-made recovery was possible:

“…if the over-indebtedness with which we started was great enough, the liquidations of debts cannot keep up with the fall of prices which it causes.  In that case, the liquidation defeats itself.  While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed.  Then, the very effort of individuals to less their burden increases it, because the mass effect of the stampede to liquidate in swelling each dollar owed.  Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions:  the more the debtors pay, the more they owe.  The more the economic boat tips, the more it tends to tip.  It is not tending to right itself, but is capsizing.”

The lessons of this paradox are interwoven into the fabric of modern/conventional economics, that whenever deflation might be present a recovery has to be forced since it cannot start on its own.  But it is extremely curious that only one half of the equation was chosen as an outcast:  deflation.  Over-indebtedness has, obviously, been warmly embraced in the decades since Fisher’s proposition.  The development of the mainstream of economics has led to the belief that intentional inflation can always defeat deflation, and therefore debt can assume a role, even a primary role, within the schematic of economic stewardship.

Fisher’s paradox survives in many forms, but among the most important was a logical derivation, namely the idea that economic participants can do what they believe is best for themselves, but in doing so harm themselves through systemic processes.  This is known as a fallacy of composition; that what is good for individuals is not necessarily best for the whole.  It overturned the traditional economic notion of an economy at its most basic level, from the time of Adam Smith describing individual self-fulfillment.  Sure, this idea had been around for awhile before Fisher’s paper, but the Great Depression “proved” that the fallacy was real and potentially cataclysmic.  Originally it was confined to the narrow interpretation of depression economics, and so the evolution of unquestioned economic management started from there.

The economics profession truly believes that there exists economic states where individual self-maximization no longer benefits the larger societal association of economic actions, so it “logically” follows that some process (or entity) has to step in and enforce conditions contrary to individual notions of self-maximization.  In other words, there are times when people must be forced to do what they perceive is against their own best interest.

In the context of depression avoidance this seems to be rather innocuous, but in the displacement of political thinking since the 1930’s, it was a slippery slope.  What Fisher’s paradox essentially required was a benevolent authority to administer and visit a kind of beneficial tyranny upon the economic population.  In the constant forward roll of history, though, the slippery slope of needed benevolence has been applied to a larger and larger cohort of economic circumstances – emergencies breed human desire for such authoritarianism.

It is important to remember that the Federal Reserve was a secondary institution for much of the post-Depression period.  After the monetary debacles of the Great Depression, especially the unnecessary reserve requirement hike in 1936 that initiated the depression-within-a-depression in 1937, the Fed was relegated to being simply a monetary check-writer.  The Treasury Dept. was the economic powerhouse, especially during a time in which the dollar was the primary tool of economic management.  The Fed was consigned to managing the money supply around treasury debt auctions to ensure the federal government’s uninterrupted ability to borrow (in some ways things never change).  When that borrowing exploded in 1965, the money supply went with it and the seeds of the Great Inflation were embedded.

Paul Volcker changed this with his “heroism” in defense of the dollar, a dramatic departure from the previous era of Treasury Dept. domination.  Conventional wisdom posits that it was Volcker’s Fed that vanquished the inflation dragon, in doing so he “created” another pillar of the fallacy of composition (high interest rates were not good for individuals, but seemed to be good for the larger system).  The chastened Fed of 1965 that allowed inflation to begin building was dropped for the activist Fed of 1980 that could apparently do no wrong (the monetary history of the 1970’s was completely and conveniently ignored).  The Fed’s reputation soared with the perceived economic success of the 1980’s, handing Alan Greenspan an amount of power unparalleled in human history. 

But how much economic success in the 1980’s was earned?  Again, conventional wisdom sees the Great Inflation ending in 1982, giving way to the Golden Age of Economic kingship – the Great Moderation.  What I see is simply a transformation of inflation from consumer prices to asset prices.  Instead of overwrought money creation circulating within the real economy in the form of wages and higher consumer prices, new credit production capabilities allowed a secondary circulation of credit money into assets, indirectly feeding into the real economy – first as interest income, second as debt – as the notorious “wealth effect”.  The economy in this age would transform from one based on earned income to one based on paper movements of created money, with the irony of the “wealth effect” being its tendency to incrementally create economic activity without actually creating productive wealth.  The global economy was increasingly reliant solely on money creation, a transformation that cannot be understated and a prime cause for re-evaluating the whole of the Great Moderation.

We see this quite clearly in the consumerism of the period.  In 1975, household spending was still largely a function of wage income.  If we adjust Disposable Personal Income by subtracting asset income (interest and dividends), we see a modest deficit in spending sources of about 3.5%.  Households spent more than they brought in from wages, benefits, government transfers (net of taxes) and rental income. Consumer/household spending needed asset income to make up that small funding shortfall (and to go beyond to generate a positive savings rate).  By the midpoint of the Great “Moderation” in 1990, the spending deficit was a chasm, 19.3%.  Without the $898 billion (nominal dollars) in asset income there was no way that consumer spending would have grown so far so fast.

That interest/asset income was a leftover effect of the Great Inflation when monetary creation found its way into growing stockpiles of “safe” financial assets for the household sector.  By 1990, US households had accumulated $5.1 trillion in deposits and credit market assets (largely US treasury bonds) against only $3.6 trillion in debt (including mortgages).  But that was a huge “problem” for the growing acumen of an activist Federal Reserve.  As the 1980’s progressed, interest rates were declining with consumer inflation (and providing a helping hand to asset prices running wild with credit now focused in that direction).  The mainstream of economics took this as a sign of success, but it was really just a marked decrease in monetary efficiency since new money was now circulating heavily in asset prices (the junk bond bubble and the new, great bull market in equities).

Concurrently, economic management had evolved in the 1980’s with the innovation of the “rational expectations” theory.  It was hailed as a huge advancement in monetary thinking coming out of the Great Inflation.  In many ways it was an adjunct to the fallacy of composition.  The rational expectations theory holds that the economic children of modern society can be fooled into undertaking activity that might be against their own best interest if some benevolent authority simply makes it look like everything will be better in the not-too-distant future.  If the Fed screws with the price and cost of money (for debt accumulation), manipulates the price of gold (for inflation expectations), or “nudges” stock or real estate prices in the “right” direction (the notorious wealth effect), the population will act today on those conjured expectations of good times tomorrow.

By the end of the 1980’s, the S&L crisis (a stark warning that economic management might not have been all that it was advertised to be, a warning that has largely been ignored) threatened to plunge the world back into depression.  The Fed and Alan Greenspan feared the consequences of a banking crisis and any attendant deflation.  The Fed funds rate was pushed from around 8.25% in April 1990 to a ridiculous 3.25% by July 1992 – staying at that low level well into 1994.  Alan Greenspan was trying to save the entire banking system from the S&L crisis by reducing the cost of funds so dramatically (hoping to see an increase in bank profits, leading to higher retained earnings and therefore equity capital upon which to pyramid more debt).  The pressure on household spending because of the collapse in interest rates necessitated a marginal change in spending, but not back toward earned income.  Instead we got the wealth effect and the myth of Greenspan’s genius.

Despite a persistently weak recovery (just ask George HW Bush) from a relatively mild recession, the Fed’s management of the economy into a “soft landing” was hailed as a new form of a New World Order.  The business cycle could be smoothed (or even eliminated) by the marginal attraction to debt and the wealth effect.  If expectations were properly managed, the public would suppress their base emotional instincts and dance to the tune set by the monetary kingship. 

It was hubris of the highest order, of course.  By the time the tech bubble finally burst (another warning of the dangers of an artificial economy) the Fed doubled down to save itself and its primacy.  The results have been disastrous as the marginal economy progressed further and further away from the fundamental foundation of wages and earned income.  The savings rate fell to zero by 2005.  Worse than that, US households added $10 TRILLION (+269%) in debt between 1990 and 2007, with $7 TRILLION coming after 2002 alone.  The household funding deficit reached a high of 24%!  Even worse than that, households had shifted preferences out of “safe” credit market assets or bank deposits and into much riskier price assets simply because the systemic cost of risk was intentionally held artificially low.

The economic foundation of the Great Moderation was an illusion, nothing more than asset prices and debt; wealth effect and rational expectations.  None of this describes a free market, capitalist economy.

Central banks and economists love to talk about economic potential, spending so much time trying to calculate it with their complex modeling capabilities and elegant mathematical equations.  But the hard truth of economic overlordship is rather simple.  The Federal Reserve, in cooperation with global central banks, Wall Street and the interbank wholesale money marketplace, simply substituted credit for earned income.  And the reason is also very simple, because debt accumulation is far more easily manipulated.  As long as households remained attached to earned income and “safe” savings assets, economic management was nearly impossible.  The rational expectations theory needs a system more attuned by asset prices and malleable debt levels.  And so marginal consumer spending shifted away from the solid foundation of jobs and wages right into the hands of the fallacy of composition and the rational expectations theory.

It is more than a little ironic that the Fed so willingly embraced indebtedness in light of their history with Fisher’s paradox.  But mathematical advances in modeling along with a growing commitment to steady inflation allowed the Fed to really believe it could stave off deflation.  So they made a deal with the debt devil to obtain the keys to the marginal economic castle and its grand artificial economy, and in the process dangerously surrendered to the over-indebted part of the Fisher’s paradox equation.  Thus the housing bubble to mediate the tech bubble since the tech bubble had some potentially deflationary consequences.  Even today, everything the Fed has done since 2007 can be seen in these terms:  the fallacy of composition, rational expectations and the preservation of the benevolent stewardship of the economic, academic masters. 

Somewhere in all this transition from Fisher’s paradox to Greenspan’s genius to debt-slavery, the system ceased to function as a free-market, capitalist system.  The free market values the bottom-up dispersal and divergence of billions and billions of free opinions, freely associating together as unfettered price discovery.  A central bank devoted to the fallacy of composition and rational expectations is a top-down system committed to manipulating price discovery to achieve ends that seem to be, and very often are, contrary to the perceptions of the vast majority of doltish economic participants.  The monetarist system is forced upon the population, no matter how much they resist. 

Indeed, the idea of an economic fallacy of composition is itself a logical fallacy.  I have no quarrel with the idea of a fallacy of composition or any logical fallacy for that matter, but logic holds no special place in social interactions.  There are no logical deductions from economics no matter how much math is applied.  It is, and will remain, a subjective interpretation of events.  Even the vaunted Fed and its accumulation of Ivy League PhD’s performs no leaps of logic.  Like anyone else with an opinion, whatever fallacy of composition it thinks it sees is still just subjective interpretation. 

And that is the real danger.  Cloaked in the apparent objectivity of math, the economic elite have gained unlimited economic power.  When you stop and think about it, you can create a fallacy of composition pretty much anywhere (and write and enforce rules based on it) – from the steep tax on savers with five-plus years of zero interest rates to mandating everyone has to purchase health insurance even if they don’t have the need for it.

The volatility of today is nothing more than a fight between the active perceptions of participants trying to maximize self-interest within the classical, traditional concept of a free economy, and the opposing forces of overlordship of the landed economic elite, trying to get the uninitiated to simply follow orders.  The elite really believes that if everyone would gladly pile on even more debt and spend with reckless abandon, the Great Moderation would once again be within reach.  Consumers should only stop thinking for and of themselves since common sense is dangerous to the controlled economic system.  To get more debt “flowing” requires active price manipulation to make the world seem like it will be better in the near future so that people will start acting like it.

Economic potential to the Fed is the level of economic activity of 2006.  To them, this is a cyclical recovery from a cyclical interruption in their normal smoothing of the business cycle.  Sure it veered way off into panic, but that was just more confirmation that human emotion needs to be managed.  But if we view the economy from the historical perspective, the lack of a cyclical recovery is not at all surprising.  The Fed spent decades building up so much monetary inefficiency, so many artificial monetary channels for indirectly “stimulating” economic activity, that it will simply take an enormous amount of new money to get it all moving in the “right” direction again (Ben Bernanke and Paul Krugman at least have that part right). 

The fact that resistance is growing, that investors are not drinking the economic Kool-Aid as much as 2009 or late 2010 is a sign of growing discord.  The efforts in the realm of rational expectations are simply not working.  That is the ultimate danger because the entire central bank gameplan is based on only that.  Without willing adherents (useful idiots?) to the central authority of economic management, everything falls back to the true potential – earned income and boring cash flow of un-manipulated dollars or euros.  With such a massive chasm between marginal economic activity and earned income sources of spending, it is not likely to be a shallow or short transition (this explains most of the inability of the economy to create jobs – so many jobs in the central planning era were based on money creation and financial “innovation”).

That is both the opportunity and danger of a system reaching its logical end.  Put another way, there is a growing realization that while free markets are messy and somewhat unstable, central planning is not really a cure for those symptoms.  In fact, it has created more harm ($13 trillion in debt is only US households) than good, more illusion than solid results.  Volatility means that the free market is at least attempting to impose itself at the expense of central planning’s soft financial repression and control.  By no means is such a beneficial outcome assured; rather the other half of all this volatility (the risk-on days) is the status quo desperately trying to hang on through any and all means (even those less than legal, like bailing out Europe through cheapened dollar swaps).

So the cost of using leveraged ETF’s as insurance against the failure of soft central planning necessarily rises, but that just may mean their ultimate usefulness is closer to being realized.  Unless you know exactly when this transition might reach its conclusion, it is, in my opinion, a cost worth bearing.

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Mr Lennon Hendrix's picture

Planned Chaos, bitchez

economics1996's picture


Here is what he was saying.

When the Fed keeps the interest rate 3% higher than the inflation rate good things happen.  Volker-Yes, Bernanke-N0.

Central planning is BS and most economists are full of BS.

Irving Fisher was an economic illiterate.

Deflation helps consumers and hurts capital owners.

Elitist hate deflation, see above.

End the Fed.

Austrian economists are the only ones worth a crap.


Burnbright's picture

I think he is wrong about volatility being a good thing though. He is right that volitility is from the market not being, or at least resisting market manipulation however I would hardly call instability a "good thing". This is the front end of shit you don't want to see the back end of. The volatility is going to get worse, and when it does civil unrest will increase.

Michael's picture

Barack Obama is the god of the country, or though, he actually thinks he is.

What Obama says goes, goes! Even though there are cases pending against him like that Fast and Furious thing. No one dares to question it. 

Just imagine what that kind of power coursing through your veins feels like if you were BO.

What would you do?

Michael's picture

Obama's behavior indicates he bows to the whims of the banksters. They are his masters. Four more years of Obama would be just as satisfactory to me as a Ron Paul win. Either way I win. If Obama wins I get to watch the carnage of the sheeple, the idiocracy who gave BO another four years. It's a schadenfreude thing.

Michael's picture

Iowans really don't have anything to lose voting for Ron Paul.

Congress ends corn ethanol subsidy



Michael's picture

You will have so much change with a Ron Paul Presidency, it will make your head spin.

There will be no doubt you have had change after a Ron Paul Presidency.

You can quote me on that

Michael N.

BigJim's picture

Yes, I saw that. I was surprised to see how little effect the announcement had on corn prices.

To all you ZHers, WattsUpWithThat is an essential antidote to AGW hysteria.

russki standart's picture

Agreed.  Thank you for your post. I am now expecting Flakmeister and crew to show up, call you a denier and demand you pay your 'fair' share of the climate debt. By virtue of your birth, you are guilty of the original sin of carbon emission and must pay to Gaia and her great profit ooops, prophet Gore.

Potemkin Village Idiot's picture

Both corn & copper will easily survive (just as Au & Ag) in secondary markets if TS REALLY HTF...

Privateers will "brew their own" if you know what I mean...

Time to make friends with a hillbilly & biuld yourself a little metal shop in the backyard shed...

russki standart's picture

economics 1996, good summary. I wish your comments could have some how been posted in advance of the article, saving a good deal of unnecessary albiet rigorous writing. 

SilverRhino's picture

PM's bitchez ... err fuck (got blowtorched in short term)

Sudden Debt's picture

Silver, how it's made


A very cool discovery channel small docu on how it's made. WOW!!

uno's picture

amazing video, so the miners bring all that equipment to the middle of nowhere to extract silver than GIVE IT AWAY because JPM says what the price is.

BigJim's picture

The shit is everywhere! It only costs $5 to get it out of the ground! etc, etc.

SilverRhino's picture

+1000 That was awesome.  Good find. 

5 bucks an ounce my ass ...

Boilermaker's picture

Are there any reports tomorrow than can be even more glorious than ever expected?  We have to just keep the propoganda machine in 5th gear to keep us this charade.

Seriously...what is it tomorrow?  Any early guesses?

slewie the pi-rat's picture


o wait, i know!


ThrivingAdmistCollapse's picture

The government will keep trying to massage every statistic.  The point to convince the people that there isn't an economic collapse happening right now.  I'm pretty sure that one way or another we are going to have a semi-planned economy in the near future.

Pegasus Muse's picture

This morning on Squawk, CNBC is presenting Attendance Levels at Theme Parks in Central Florida as an indicator of economic recovery.  When joblessness, unemployment compensation, Food Stamp participation, GDP, home sales, homes prices, car sales all let you down, the professional crap peddlers just create new indicators like Theme Park Attendance to baffle viewers with BS. 

SWRichmond's picture

OT, but related to central planning and I want this high in this thread for the exposure.  Forgive me.

There is a fiscao brewing in the Republican Presidential Primary in the commonwealth of Virginia.  The state republican party has set a high standard for certfication to be on the ballot.  The date for submission of the required 10,000 verified signatures has passed, and only Ron Paul and Mitt Romney have passed the test, so only these two names will be on the ballot in the Virginia Repblican Presidential Primary to hbe held on March 6th.

After the fact, RPV announced that anyone who wanted to participate in the taxpayer-financed primary election would first have to sign an oath promising to support the eventual republican nominee in the November election. 


"In order to cast their ballots in the GOP nominating contest, Virginians will have to sign a form that says, “I, the undersigned, pledge that I intend to support the nominee of the Republican Party for president,” according to the Richmond Times-Dispatch, which first reported the move.

On Wednesday, the state Board of Elections approved the pledge form, as well as signs that will hang in polling places advising voters of the state party’s policy."

All it takes now if for someone to go to the polls, refuse to sign the pledge, and then be denied the right to vote in a taxpayer-funded election.  Virginia Republican Party makes international news, instant notoreity, just the kind I am sure they want.

I am positively drooling at the prospect.  I am sure that RT would cover such a thing.

YesWeKahn's picture

Tyler, you are too gentle. This isn't central planning, this is some criminals, using helping economy as pretext, transfer wealth from the mass to the top earners.

A true central planning would never let this kind of stuff to happen.

Mr Lennon Hendrix's picture

Central planning is anti-democratic dictatorship.  That's about as bad as it gets.

economics1996's picture

You are right about the central planning, except the whole propose is to transfer wealth into a few hands.

LowProfile's picture



This isn't a free market, this is some criminals, using helping economy as pretext, transfer wealth from the mass to the top earners.

A true free market would never let this kind of stuff to happen.

Fixed it for you.

s2man's picture

You will buy equities, and you will be happy.

   - The Office of Morale Adjustment.

kaiserhoff's picture

The Jews are going ape shit over Ron Paul.  He must be getting some real traction.

Daniel Henninger, Editorial Director - WSJ - had a sleazy hit piece today.  Dorothy Rabinowitz did a back stab two days ago.They have lost all pretense of balance or sanity, just carrrying water for the Zionists.  This will cost them big time.  I used to have some respect for Paul Gigot, who runs that rag, but not anymore.

General Decline's picture

If the Zionist do not approve of you, you will not be elected.

Shineola's picture

Let's call these folks by thier proper appellation, Khazars.   They are not decendants of Abraham, neither are they Semitic.  More likely, they decended from the Mongol hordes and "convered" to Judaism, for political reasons, in the 7th century AD.  I don't know how that makes them "chosen", but the real decendants of Abraham probably never left the area called Palestine. 



terryfuckwit's picture

your commander in chief Benji will confirm this  on request

Arkadaba's picture

He is getting traction especially among the young and that is what is scaring them. Today, I saw a post by one of the most "liberal" (define as you will)  persons I know and it was very positive. 

ACP's picture

Central Planning Bitches, bitchez.

TheAkashicRecord's picture

The sum of human knowledge is at our fingertips, such a large disconnect between the decentralized nature of information and the centralized nature of power and planning. 

Essentially Hayek's argument, but now has been taken to the nth degree with the internet.

mayhem_korner's picture

What we are witnessing is a titanic battle between the world as it really is and the one central banks need you to believe it might be (if only you would set aside your own perceptions and self-interest).  The fact that volatility has risen is a clear indication that the central bank-inspired anesthesia is no longer as effective as it was in 2009, or even in the QE 2.0 inspired insanity of 2010.


Agree.  Volatility is simply a measure of how reactive the marketplace is to information, irrespective of whether the information is factual.  I like to think of volatility as the "belief spread" - that is, the basis between different views of something's value.  The wider the spread becomes the more volatile the underlying becomes.

With that, this article points to what some refer to as the "reality spread" - the difference between (i) the matrix world's manufactured valuation as concocted by the string-pullers, CBs, paid-for MSM, and the attendant HFT algos that can insta-crash an asset on a mere whiff of hopium, and (ii) real valuations, which are difficult to nail down because they are understood by a dispersed group that cannot easily collaborate to move the markets.  As the reality spread widens, volatility upticks are palpable.  How many times in the past 6-12 months have we seen a major shift in a credit rating, bond yield, commodity price or other indicator that led us to watch very closely the ensuing 48 hours?  That is to me the indication that the pendulum is in fact a wrecking ball scraping some of the matrix walls.

It's not going to settle down anytime soon, because the broken things won't be fixed.  Just the slow but eventual dissipation of the fog around reality for the masses.

My 2 oz.

Sean Fernyhough's picture

Irving Fisher failed to predict the crash, in fact he advocated against its possibility right through to less than 2 weeks before "Black Monday" in 1929.  As a result he lost a fortune.  So, unlike Bernanke he had significant skin in the game.  And also unlike Bernanke he changed his theories in the light of evidence.

The fact is that the post crash theories of Irving Fisher have largely been ignored by the mainstream.  Almost 90% of the over 1,200 citations of Fisher in academic journals from 1956 were references to his pre-Great Depression works.

So that proposition in the article is wrong.

Bernanke's wet dream economist and supposed expert on the Great Depression is the prize Monetarist idiot Milton Friedman.

Markets have emergent behaviours that cannot be understood by looking at an individual participant in isolation. The fallacy of composition is one aspet of that more general chaacteristic. And, in fact, Adam Smith had far more sense than the article gives him credit for, witness for instance his advocacy (in opposition to Bentham) of a legal limit to the rate of interest that could be charged on a loan on the basis  that "Where the legal rate of interest,on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors... A great part of the capital of the employed with advantage."

So the article is wrong in that respect.

I stopped reading at that point.  Too many mistakes.




Mr Lennon Hendrix's picture

Deflation: Making Sure "It" Doesn't Happen Here

-Remarks by Ben Bernanke

Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level.

-The Uninformed Ben Bernanke

Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

-The Admiring Ben Bernanke

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

-The Alchemist, Ben Bernanke


economics1996's picture

Irving Fisher made a lot of mistakes and in my opinion, never understood money and markets.

Sean Fernyhough's picture

Irving Fisher changed is views when the facts changed - how many economists do that?

BigJim's picture

In terms of economic thought, Adam Smith was actually several steps backwards in many respects. He advocated the Labour Theory of Value, for instance, which had already been dissected and dismisssed by the Scholastics hundreds of years prior. But because he wrote in English - as opposed to the Latin, Spanish and French of earlier, more advanced economics thinkers - his works were more widely read throughout the Anglo-saxon world, which, undergoing expansion and ascendency, spread his thought far and wide.

It's not up to the government to tell me (or anyone else) how much I can charge when renting my capital out in a voluntary transaction with a borrower. If I'm charging over the market rate, the borrower can find someone else to borrow from at a lower rate. And if he can't find someone else, then he's out of luck - no one wants to risk their capital with him. And almost certainly for good reason.

I suggest you go back and read the rest of the article. You have a lot to learn, grasshopper.

Sean Fernyhough's picture

"It's not up to the government to tell me (or anyone else) how much I can charge when renting my capital out in a voluntary transaction with a borrower. If I'm charging over the market rate, the borrower can find someone else to borrow from at a lower rate. And if he can't find someone else, then he's out of luck - no one wants to risk their capital with him. And almost certainly for good reason."

And from that position you get banks using their sub-prime subsidiaries to maximise loans to people who they know cannot afford to repay precisely because they can be charged a higher rate of interest.  Predatory behaviour.

CrashisOptimistic's picture

This is more or less logistical bullshit.  Yank this article.

There is volatility because volume has collapsed and only computers are trading, and they react and over-react to each news item that crosses the wire.

The rest is hand waving.

lewy14's picture

If anyone has any funds with this guy, yank them too.

I willingly pay that cost [of leveraged inverse funds] because I have no concrete idea when another fit of sustained selling will actually take place, but I have more than an inkling that it will.

OFFS. This guy puts a hedge on with no idea what it really costs... no clue how to trade other hedging vehicles... not qualified to run money in any universe. Full stop.

disabledvet's picture

All analysis starts with one of the greatest questions ever "it all depends on what the meaning of is...is." Since we all are forever "shooting in the dark" with any analysis...as this and pretty much all before it and probably all after it...shifts to "forecasting" then before we state anything we must ask AND ANSWER "what's going on in the first place." even a cursory reading of this missive begs the question "where is the data?" sure "people have points of view" How is this author espousing anything other than HIS point of view then? For me I stare at a chart of the 10 year treasury and look at it like I'm looking at a Rothko. First off I say (to myself) "gee I'm glad when I gave my two cents the guy in charge ignored me." and then I "go to work"'cuz clearly all the blow horns have been telling me "ignore that 10 year just like we do!" I guess the best explanation I can give at this point of my predicament is "somewhere inside this sell side show boater is an asset manager lurking"--but it takes an enormous amount of patience...and an inner calm...something along the lines of "don't worry, we're not Goldman Sachs. We eat our own cooking. We will not steer your herd into the abyss just so we can have a slab of beef "on the cheap."

johnjb32's picture

Listen to Mike Ruppert and Joe Rogan talk about this and so much more:



youLilQuantFuker's picture

Is he crying while Rogan is tripping on medicinal mushrooms?

TheAkashicRecord's picture

Love Rogan's podcast, long time listener

non_anon's picture

if I'm here, where's Waldo?