Guest Post: It's Time To Give Up On Mainstream Economics

Tyler Durden's picture

Submitted by guest contributor Gregor Macdonald

It's Time To Give Up On Mainstream Economics

Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders.  The modern economist is the clinician with no patients, the engineer with no projects. ~ John Kay, from The Map is Not the Territory: An Essay on the State of Economics, October 2011

I’m not quite sure what a depression is. ~ Martin Feldstein, in an interview with Kelly Evans of the Wall Street Journal, October 2011

A Failure To See the Obvious 

Prior to 2008 it was generally understood that the profession hardly merited its claims of its own predictive utility. So the failure to assign enough risk to such a crisis as befell the developed world in 2008 was, frankly, no surprise. But in the aftermath of the crisis, economics, in its professional form, has revealed itself to be damagingly disconnected from observable reality.

A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions.

Mostly the profession remains curiously naive about the nature of debt, an understanding of which is more critical than ever as the developed world enters a 'slow' to 'no-growth' phase of its history. Indeed, many of the papers, interviews, and op-eds from central bankers and economists in the face of our present-day sovereign debt crisis are little more than an eerie restatement of the discussions which took place about private-sector debt from 2006-2008.

For a profession tasked with the analysis of dynamic systems, modern economics can be ploddingly linear. And for a profession supposedly guided by math, the descent into "sociology lite" is all too routine. One of the more consistent errors (or nervous tics, if you will) comes in the area of scale and proportion. A favorite and most astonishing example for me remains former Dallas Fed President Bob McTeer’s explanation of the cause of the 2008 crisis. Writing in his blog at the end of 2009, McTeer set out to defend the US Federal Reserve for its role in the catastrophe:

It is taken as given these days that the Fed created the housing bubble. If this is true, then it must follow that the Fed is responsible for the bursting housing bubble, the ensuing financial crisis and subsequent recession. But, as I recall, the Fed did not create the housing bubble. It was the collateralized subprime loans, not a reversal of home prices, that caused the problems. Maybe there were too many loans, but, if so many had not been bad loans, air could have come out of the bubble without devastation...Subprime loans triggered the crisis and recession. Other things like too much debt and leverage made the problem worse, but didn’t cause it.

Let’s stipulate that the issue of causality can almost always broaden out into legitimate disagreement. But Mr. McTeer’s claim here is so grossly disproportionate to the total size of the credit bubble, which was not limited to housing, that one is compelled to ask if Mr. McTeer actually understands the system over which the Federal Reserve presides. This blind spot towards debt growth, and in particular the rate of debt growth, counts as one of the more curious revelations to emerge from the crisis. Indeed, while the crisis finally produced a broader appreciation by the public of debt dynamics, it also produced a clearer portrait of the economic profession’s intractable position towards debt. In short, they “don’t see it.”

And, here’s what they don’t see. The following chart is composed of total debt growth in the US economy from 1929 and helpfully covers the period through 2008, compared as percentage of GDP. As you can see, the rate of debt growth starting after 1999 should have been on the radar of economists and central banks. Especially the Fed. The 1985-1998 period was relatively slow by comparison. But starting in 1999, total US Credit Market Debt to GDP exploded higher, from 250% to 350%.

Let’s rework the claim of McTeer, as follows: Subprime loans represented too small a portion of total credit to have either triggered or caused the crisis and recession. When growth slowed, the unsustainable amount of debt and leverage in the entire system was revealed, and thus made everything worse.

The cruel irony of McTeer’s faulty understanding is that the US economy would be powering out of recession right now, with typical 4-6% GDP growth, had the credit bubble been confined (contained!) to subprime. The relegation of the crisis’ beginnings or causes to subprime is now considered a kind of joke that flags a financially illiterate (or political) view. The US should have been so lucky as to have merely faced a subprime problem. Now there are 10.7 million US homes in negative equity. Twenty-five years of strong credit growth, a deflationary labor shock from the developing world, and a phase transition in energy prices set the stage, not for a post-war recession, but a depression. A meandering economic stagnation that can never produce a full recovery. 

Founded On a Fallacy 

Modern central banking came into existence, of course, during a secular growth phase in the developed world funded by cheap energy. Its task for most of the past 100 years has been to regulate growth -- not to manage decline. Much of the commentary you saw prior to 2008, such as Ben Bernanke’s sincere lack of concern about a US housing bubble (“I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis...”) is, of course, duplicated today as we confront a similar endgame in sovereign debt.

Economists in 2010, when the European crisis began, were sanguine. In the tête-à-tête between Hugh Hendry and Joseph Stiglitz last year, Stiglitz was adamant that debt service for Greece was no problem. More recently this summer, Jeffrey Sachs claimed at FT that there was a way out for Greece, by allowing the country to borrow at rates enjoyed by Germany. That may have seemed like the biggest catch to such a solution. I would submit, however, that the Sachs proposal contained a much larger uncertainty that is now the new blind spot common to the economics profession: the assumption of continued growth.

One of the more irritating personality traits of economics as a discipline is that it continually incorporates every trend into its growth model, and then identifies it as a good thing. The secular decline in US manufacturing jobs was deemed as such, as it “freed up” the populace to take service jobs. Interestingly, in our post-crisis economy, much of the selected regional strength in the US is now very much related to exports and a small resurgence in light manufacturing.

The Fed should have been paying closer attention to the multi-decade trend in US manufacturing employment. Instead, Alan Greenspan, a fan of Ayn Rand, believed the world operated in a magically offsetting series of harmonics, in which self-interest propagated though the financial system, producing a grand balance of risk. It is easy to understand how debt growth, cost inflation in health care and education, and the unsustainable bloat in the financial sector would flourish under such a paradigm. After all, “one person’s debt is just another person’s asset,” so what could possibly go wrong?

Worsening What They Don't Understand

When central bankers can’t initially understand why markets are rebelling against debt levels, they often turn to simplistic behavioral concepts. But a small dash of social psychology can be a dangerous thing when injected into monetary policy. Perhaps some moderate respect should be given now, many years after his tenure, to Alan Greenspan, who in testimony finally admitted that "the entire model he used to describe how the world worked, was wrong." In similar fashion, Ben Bernanke in his 2011 public testimony has admitted that the Fed “cannot print oil,” cannot solve problems without help from fiscal policy, and probably cannot force a faster economic recovery.

But one wonders how evolved the Fed chairman really is, given his public statements in 2009 that the financial crisis was merely in the fashion of a 19th-century panic. Instead of exponential growth in private credit, capricious monetary policy from the Fed itself, or the guns-and-butter fiscal policies of the government, Bernanke voiced publicly in his PBS TV performance and also at Jackson Hole that we had merely suffered a Bagehot-type panic. This may have been why he thought, as did many others, that a normal recovery would ensue.

Here is the key passage from the Jackson Hole conference on August 21, 2009, Reflections on a Year of Crisis (Interpreting the Crisis: Elements of a Classic Panic):

How should we interpret the extraordinary events of the past year, particularly the sharp intensification of the financial crisis in September and October? Certainly, fundamentals played a critical role in triggering those events. As I noted earlier, the economy was already in recession, and it had weakened further over the summer. The continuing dramatic decline in house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets, and thus about large potential losses at financial institutions. More broadly, investors remained distrustful of virtually all forms of private credit, especially structured credit products and other complex or opaque instruments.


At the same time, however, the events of September and October also exhibited some features of a classic panic, of the type described by Bagehot and many others. A panic is a generalized run by providers of short-term funding to a set of financial institutions, possibly resulting in the failure of one or more of those institutions. The historically most familiar type of panic, which involves runs on banks by retail depositors, has been made largely obsolete by deposit insurance or guarantees and the associated government supervision of banks. But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence. Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit.

The Fed Chairman is using a technique here called hiding in plain sight, or perhaps secrecy by complexity. It is inarguable that a behavioral panic took place. But the aim was clear: to avoid the debt saturation in OECD/developed nations and the United States and the years of slow-to-no growth it was fated to impose. More broadly, the Fed had been “managing” the growth of debt in the US economy for over two decades. 2008 was the signal that the long, secular era of lowering interest rates to help the economy manage its debt levels had reached its endpoint.

One possible explanation for this blind-spot towards debt is that the economics profession is largely in service to the political class. Books, such as Reinhardt and Rogoff’s This Time is Different, which addresses the limits imposed by debt, are generally not in favor in the current era. Equally, the moral flavor to much of the right-leaning thinking on debt is also unsatisfying, as it also does not address debt-saturation so much as fiscal rectitude. What matters instead are the levels in both private-sector debt and public-sector debt that impose operational restraints. Total debt service as a proportion of income will always create a limit eventually among private sector borrowers. That is precisely what began to occur in the US and was the prima causa of the recession. However, the precise, problematic levels of debt for sovereign nations are trickier to identify.

The Tide Is Changing

Through a combination of confidence, debt service, actual economic flows, and the marketplace, however, 2012 is almost certainly the year that the present sovereign debt problems will be resolved, one way or another. Also, this week’s US dollar swap operation likely points towards one of the two macroeconomic endgame pathways that I outlined last month.

The current economics profession in general, and our central banking leadership in particular, sheds even more credibility as it careens on, blinded by its own light. The process by which economic activity and resources are coaxed into being by stimulative monetary policy has reached its terminus, and the public will finally understand this dynamic over the next year.

In Part II: How The European Endgame Will Be The Death Knell For Modern Economics, we predict the coming endgame to the European fiscal and monetary crises. Doing so is becoming increasingly easier as we better understand the mindset of today's economic leaders and the shrinking number of options they have to address the issues before them. In fact, we think the shroud of awe and mystery that our grand economists have wrapped themselves in is fast-dissipating, and that the systemic pain their failures will inflict in 2012 -- initially most visible in Europe -- will finally cause the populace to look to a new school of economic thinking.    

Click here to access Part II of this report (free executive summary, enrollment required for full access). 

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kill switch's picture

We are all cought up in the devils bargin     Nothing to loose or gain, million year old carbon.

New_Meat's picture

I'm glad u are cought.  Don't know what a devils thingie is. U carryin' the Football tonight? - Ned

Popo's picture


"Modern central banking came into existence, of course, during a secular growth phase in the developed world funded by cheap energy. Its task for most of the past 100 years has been to regulate growth -- not to manage decline. Much of the commentary you saw prior to 2008, such as Ben Bernanke’s sincere lack of concern about a US housing bubble (“I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis...”) is, of course, duplicated today as we confront a similar endgame in sovereign debt."

kill switch's picture

That is correct,,, Thanx my spelling = vodka

sosoome's picture

Depends on the meaning of "we".

Racer's picture

Can't see the wood for the trees in other words

MassDecep's picture

Prepare for war, bitchez!

It's their solution.

Turd Ferguson's picture

Here's your money shot:

"One possible explanation for this blind-spot towards debt is that the economics profession is largely in service to the political class."

I like Chris Martenson but, personally, I think he lost a lot of credibility once he started doing podcast interviews of anonymous, mystery dorks who run PM-based websites. 

Seize Mars's picture

I like Chris Martenson but, personally, I think he lost a lot of credibility once he started doing podcast interviews of anonymous, mystery dorks who run PM-based websites. 


Good one. Keep up the good work, Turdski!

kito's picture

the guy has to eat. as long as he is true to his word, and finds it necessary to open as many eyes as possible to the problem, why should it matter what audience he chooses? 

BigJim's picture

nice eye for irony you got there

I am a Man I am Forty's picture

turd was interviewed by chris

slewie the pi-rat's picture

wiping up coffee, here...

earlier, i followed a GATA link to this (paste):  ["Raw Inflation via IMF"]

Economist and former banker Alasdair Macleod writes today that raw monetary inflation via the cashing of Special Drawing Rights from the International Monetary Fund likely will be the next step by central banks to save bankrupt nations, last week's currency swaps having been undertaken to rescue insolvent banks.

...which led to this macleod-ing:  Currency swaps – the beginning of a 'solution'?   which is a possible contextual framework for what the banksters did last week which people might want to consider...

mtomato2's picture

Coffee at 6:15 Eastern?  Better you should indulge in bananas and milk...

bugs_'s picture

anonymous mystery dorks just are not tenure track keynesians?

Ignatius's picture

"One possible explanation for this blind-spot towards debt is that the economics profession is largely in service to the political class."

The money shot, indeed.  But not because listening to Chris M. makes my head implode.

Debt is the blindspot. 

What did Rothschild mean when he said "Let me issue a nations currency and I care not who makes its laws"?

The banks make an enormous rentier's income from issuing our debt based money and then sees to the development of an 'economics profession' filled with those who never address this profound fact. We are paying rent for the privilege of having these wankers issue our currency.

How much income?  Look at the bailouts.  Note the lack of prosecutions.  Note the police head-crackers all over the OWS movement.  Enough money to buy the whole damn system.


trav7777's picture

how much income? accounting has been done.  So let's look the FUCKING PALACES the Rothschilds had.  Couple of them got a barony, IIRC.  Ain't seen no baron with digs as big as the King's.  Just google around at their palaces and landholdings and put yourself back when they were built and imagine that shit.

THAT is wealth, THAT is power.

Freebird's picture

Behind every fortune, a crime

DavosSherman's picture

I heart CM, I blogged the DG for him for about a year.  

Great guy.  


I have to give him credit---personally if someone is an effing psycopath I think they need to be called out, called an assclown, a moron.  But maybe CM doesn't want to not turn anyone off from visiting his site.  He is also quite a class act.

"One possible explanation for this blind-spot towards debt is that the economics profession is largely in service to the political class."

Personally, I think being politically correct is incorrect to our fellow human beings.  In the old days, assclowns who serviced the political class got the pointy end of a pitchfork or the hot end of a torch.  Bernanke and the Goldmanites would have lasted a week in the old days and our for-fathers wouldn't put up with this BS that we are stuck with today.

Just sayin...

Snakeeyes's picture

Krugman continues to crow that huge debt to GDP doesn't matter. Mostly because Krugman puts his Socialist/Progressive beliefts add of his economic thought process.

Look at this Real GDP in the EU was 0.2% last quarter. 86% Debt to GDP. How can this NOT end badly? Answer? IT WILL! They need HARRY POTTER!!!!!!

blu's picture

Mainstream economics became disconnected from reality the moment it failed to recognize that industrial growth had nothing whatever to do with market forces or rational players, and everything to do with the stored bonanza that is OIL.

End of oil (or even a reduction in extraction) is the end of growth. Period. Economists will never admit this as doing so will make a laughing stock of 100 years of their windy pontifications concerning markets, and their Schools of Economics will empty like sieves once students realize that economics was just the voodoo soothsayer of the industrial age.

Caviar Emptor's picture

their Schools of Economics will empty like sieves once students realize that economics was just the voodoo soothsayer of the industrial age.

Oh yeah? What about the rise of online gaming and dating? That's growth to the moon

blu's picture

Someone might argue that the above account should include COAL and natgas as alternatives, so that the free-wheeling growth machine can roll on for another 1,000 years. I say that is incorrect. The industrial age was born from the womb of coal, but did not become a global phenomenon until uses were found for OIL, which is both easier to burn and transport, is the key enabler of dominate industries such as auto manufacturing and transportation, and distills into literally countless derivatives of nearly indescribable value.

No. It is CRUDE OIL or nothing, and any misstep in the extraction and distribution in crude oil will be the death knell for 100 years of break-neck growth, and the end of all the curious and distracting hand-waving that attempted to explain growth-derived-from-oil as instead a manifestation of some kind of inevitable human genius rather than as a one-time temporary gift from the Universe.

Caviar Emptor's picture

US SUV sales are up again, after taking a breather in 09-10

kito's picture

its mostly prepper sales this time..........

blu's picture

... which is the only proof you need that the industrial propaganda machine is still hitting on all cylinders. These guys are Hell-bent on taking us all over the entropy cliff with them.

Caviar Emptor's picture

Of course. Oil has dictated politics since the 1860s. 

LooseLee's picture

Unfortunately, these same boobs will be offering them for sale at 50% retail in the next 3 years due to the cost of oil! And the moron dealers wlll be offering 50% of retail for the very same SUV! What a bunch of IDIIOT MORONS! Good luck to you!

trav7777's picture


The oil age was it...look at the population graph, look how much things changed just in one lifetime.  You went from the age of horses and walking to machines that could go faster than seemed conceivable.  It became possible to travel across the entire continent in relatively short time.  Then the car, then the fly around the world.  I mean, think about that, something we take for granted, FLIGHT, was the dream of man for 10,000 years...since there were dreams.

And only in the past 110 years was it achieved...because of oil.  So many things has it enabled, truly the piss of the Gods.

Coal dug by hand has a higher EROI, but oil is about POWER.  Oil does more work at a faster rate...those who understand physics understand that power is what matters, not work.

We're gonna need a helluva lotta nuclear plants LOL

bob_dabolina's picture

The labor force participation rate for the manufacturing industry is as low as it was in 1940?

No bueno

knukles's picture

It's all because, regardless of the school of economics one's lens is comprised of, each simply distorting reality differently, fail to give full credence to the fact that this is a debt deleveraging, not a normal business cyclical downturn.
Further exacerbating this collective delusion is that the politicians regardless of national orientation or socio/political affiliation, simply cannot retreat from their normalized expansionary economic promises to everybody for everything whilst looting the nation's treasure practices.
Indeed, the funds available for bread, circuses and basic services have been in the aggregate, squandered.
There is no more money, they've already printed too much.


mtomato2's picture

"Debt deleveraging" FTW!!!

Will MSM ever pick that up?

Rainman's picture

Most eCONomists today see whatever their paycheck tells them to see. Same goes for accountants, ratings agencies, etc.

tony bonn's picture

the purpose of main stream economics is not to understand economies but to rationalize governmental policies related mostly to totalitarian aggregations of power....

economics does not seek anything but to advance is hucksterism at best and a hand maiden of naziism at worst...


death_to_fed_tyranny's picture

The only economics I understand now is," HOW CAN I FUCK THE BANKS!"!



i-dog's picture


Thank you for summarising American morality in so few words.

death_to_fed_tyranny's picture

"Thank you for summarising American morality in so few words."


FUCK YOU VERY MUCH! Morality is for the sheeple. So go talk to a priest. First get on your knees and open wide sheep!

IQ 101's picture

Buy superglue,tampons and toothpaste.

Caviar Emptor's picture

Two simple home truths that the "science" of economics ignores: 

The world changes

Economics and politics are inextricably linked

AldousHuxley's picture

Economics = justification of power to those with money

Politics = justification of money to those in position of power


Economics brainwash you into believing that rich = earned by merit but in reality it is mostly luck (right place, right time, right people, right skills). Rich are status obsessed because they don't want anyone to find out the dirty secrets in how they acquired wealth.


Politics brainwash you into believing that people in power = earned by trust but in reality it is mostly lies (promise everything to everyone without accountability). Politicians are popularity obsessed because they dont' want anyone to find out their alterior motive (aka. major lobbysts)