Murphy's Law Is Fed's Law, And Everything Is Wrong

Authored by Jeffrey Snider via RealClearMarkets.com,

As it turns out, there actually was a Murphy. His now ubiquitous American idiom, Murphy’s Law, is well-known to everyone: whatever can go wrong, will go wrong. The reason it has proliferated and penetrated to every corner of our modern society is the embedded truth sprinkled with just a kiss of post-modern ironic fatalism.

As a result, it doesn’t quite mean what the original version did. I think you, as I, will prefer the first one.

That Murphy was Air Force Captain Edward A. Murphy, Jr. Around the time Chuck Yeager was out at Edwards Air Force Base in California breaking the sound barrier, in 1947, another less well-known figure, John Paul Stapp, was in the same place at the same time trying not to kill himself by testing the limits of the forces that would otherwise kill him.

In addition to being military, Captain Stapp was also a medical doctor. He was often rumored to be the physician who signed off on Yeager’s famously broken ribs so that the latter pilot would be able to make history the very next day by becoming the first human to ever break the sound barrier. That didn't actually happen but the truth, as is often the case, was more interesting as filmmaker (and author of "A History of Murphy's Law") Nick Spark discovered. Yeager related to Spark that it was actually a vet in Rosamund, California who fixed up his ribs, not Stapp.

But Stapp did make significant contributions to history. More important than any footnote to Yeager's accomplishments was his other incredibly dangerous work, where the good doctor would repeatedly and voluntarily strap himself into a rocket-powered sled in order to examine the potentially catastrophic effects of massive physical forces on the human body.

In one of his more famous runs, Capt. Stapp climbed aboard the apparatus, nicknamed Gee Wiz, blasting down the test track wearing no helmet and on his body nothing more than shorts and a thin T-shirt. The idea was pretty simple: accelerate the machine to the limits of speed, which were closing in on the sound barrier for these sledges, and then decelerate in the least amount of time mechanically possible.

The tested forces and impacts impacted much more than military jet designs. Everyone riding around in an automobile today, meaning everyone, owes some significant gratitude to Dr. Stapp’s amazingly selfless investigations. After doing things to himself hardly any person alive can have imagined, Stapp also worked tirelessly to share what was learned with the auto industry, the safety of everyday folks becoming more and more the embodiment of what he was doing and why.

And because he was out there in the scorching California desert pushing right to the edge of the envelope, his equipment needed to perform flawlessly. If it hadn’t, not only would Capt. Stapp have been killed, how many multitudes of others would’ve needlessly followed?

Enter Capt. Murphy. The story that was told by direct witnesses to Nick Spark was that Murphy’s role was pretty minor in it. He had come to the base for only a very short time, overseeing one small technical aspect of Gee Wiz’s operation. The couple of technicians he brought along apparently screwed up the installation of a pair of transducers which were expected to more accurately measure acceleration forces (G forces).

Running the sled with a chimp aboard to test and calibrate what was a new setup, they were all stunned when the gauges showed zero. Whichever mechanic had installed them with electrical bridges wired backwards, the readings for one canceling out the readings for its opposite. A relatively minor mistake.

When informed the next morning of the snafu, an ornery Murphy allegedly snapped back, “If that guy has any way of making a mistake, he will.” It wasn’t clear which guy, exactly, had aroused his officer’s ire. Either way, the legend was born.

Murphy’s Law, however, didn’t take full shape until a few days later, after Capt. Murphy had faded back into the obscurity of the vast military bureaucracy. Capt. Stapp, on the other hand, had been tasked with handling a press conference where he was asked hard questions about the nature of his business.

What they were all doing was dangerous stuff, putting not just his own life at risk but of those around him. And what about the downstream consequences? Even more lives at stake; far more than any of them could’ve known in those early days of advanced scientific study.

Answering the reporter’s question, Stapp said the guys working on the project adhered to principles only recently dedicated locally as this Murphy’s Law: if it can happen, it will happen.

They had to think ahead, think on their feet, all the while trying to worry about every little thing and all pushing the very edges of survival. They couldn’t afford indulgences, what-ifs designed to save a reputation or adhere needlessly to a religious-like doctrine.

Maybe the original is only a slight change in slant to the wording before the current version, but there’s a world of difference in it. These people weren’t expecting failure to plague and harass them, as the current iteration makes it seem, rather they were anticipating even welcoming breakdowns which would demand their own ingenuity to overcome.

Everyone realized the complexity, therefore they were looking ahead for problems so that the way forward, because there would be a way forward, could be achieved with as little risk and maximum efficiency as possible.

The original Murphy’s Law was a hope-filled expression of harsh reality being surmounted by retail-level human genius. Simple. Elegant. Devastatingly powerful because it was small “s” science practiced in another one of those beautifully informal settings.

No wonder it was corrupted.

Capt. Stapp, in addition to being a tough son-of-a-bitch as well as a doctor, he was also known to be something of a wit and wordsmith, too. Crafting this first version of Murphy’s Law for the cameras, he also put together several others including one he called his Ironical Paradox: the universal aptitude for ineptitude makes any human accomplishment an incredible miracle.

The sentiment embodied within it undoubtedly contributed to the perversion of its more famous cousin. History, or at the very least progress, is never smooth and linear. It comes in fits and starts, big leaps and then prolonged periods of nothing but intellectual stagnation. And the reason is no more difficult to understand than these clichés.

People aren’t perfect, nor perfectible.

All of which brings us to the cool mountains of Wyoming in the year 2020.

What everyone heard from the last week’s media summations of Jay Powell’s virtual address to the virtual conference was “lower rates for longer.” Massive “dovish” “accommodation” for as long into the future as it is possible to look toward. Pure Japanese (oops, no one said that).

Specifically, he referred to this as changing monetary policy focus from merely a symmetrical one to an average inflation target (if you’re trying to figure out the difference, you’re not alone).

What you didn’t hear was all the analysis and scholarship that went into this Grand New Strategy. The reasoning behind what they are telling you is a huge deal.

It’s not just that the economy is in bad shape right now and policymakers decided on a whim to do something (they’ve already done plenty of that). Chairman Jay Powell’s overhaul was begun all the way back in November 2018, which already implies there must’ve been some reason to spur on such big changes. Here we’ll take them at their word; if this is a big deal, then how unsatisfactory might it have been to shove even the most stubborn among policymakers towards one?

We’d already heard rumblings before. For quite a few years now, researchers and Economists driven by the work of FRBNY’s John Williams have been playing around with R* theories. The natural interest rate, therefore the neutral interest rate, has fallen, they claim. What that might mean insofar as monetary policy has been concerned is that maybe it was less powerful than they once thought.

Yeah, I know. It’s not what central bank chief after central bank chief has told the public. Each new QE was always the biggest, baddest, most guaranteed successful program Ivy League Economists could have ever come up with. Now, R*?

And it only got worse – mostly for us, but also for their QE’s. The one thing that could have possibly restored the honor of Ben Bernanke and his successors was the unemployment rate. The lower it went, the more it suggested the economy had reached full employment. At full employment, QE is a complete success.

However, as you’re no doubt aware, the unemployment rate kept going lower and lower and lower. By 2019, it had fallen to a 50-year low – at the same time the US and global economy was beset by an “unexpected” downturn.

It’s not as if questions haven’t plagued the unemployment rate from the very end of the last “great recession.” The participation problem is well-known, too, but Economists have sought excuse after excuse to write it off as a statistically insignificant quirk, or to blame the American worker for it.  

But, and there was always this “but”, the main labor market ratio required corroboration no matter how outwardly goading. It’s one thing to say the number must have dropped low enough to be at or even past full employment; it’s quite another for full employment to show itself in the real economy, which it would’ve done had it been real.

Inflation, in other words. AW Phillips’ updated relationship between employment and consumer prices, all of which traverses directly through economic slack and wage rates. If the unemployment rate had been correct, well below all prior estimates of full employment, wage rates would’ve accelerated sharply setting off sustained, broad consumer price increases as company after company desperately competing for the allegedly scarce marginal worker passed along the increased costs to their customer bases.

Implicit in the Fed’s Grand Strategy Review, therefore, is a full-blown admission that this never happened. Fed officials like Powell who charged into office as a hawk kept saying that it was going to happen, that it was beginning to happen, now years later to quietly, meekly accept the reality that it never once did.

But why?

The most obvious answer is that the participation problem was a real factor, that sizable, verifiable economic slack must still remain behind even after the passage of a dozen years, and that monetary policy fell way, way short of every single one of its goals – therefore both statutory mandates.

Oh no, cried the Fed’s vast teams of researchers! No, no, no. The Phillips Curve itself must’ve shifted, flattening out to something more like the yield curve, so low and flat as to be nearly unrecognizable as one. But whereas the latter has been evidence directly contradicting the mainstream story, the flat Phillips Curve offers it a way out. Tempting, no?

At nearly a level horizontal line, this would say no matter how large the increase in expectations for growth the result in inflation would be exceedingly small.

Like R*, though, this requires a fundamental rewriting and reordering of basic economic processes to get there. What would those have to be in order to flatten Dr. Phillips’ great legacy to such a huge degree that the 50-year low in unemployment couldn’t muster the slightest sustained elevation in consumer price advances?

Well, you see, they don’t really know. Several crude theories abound, of course, but what’s going on here is about as unscientific as it gets. The theory of monetary policy, that it led to robust economic circumstances, fitted to the data and evidence piled up against it.

Money printing always leads to inflation, yet the reckless money printing the Federal Reserve and other modern central banks are alleged to have conducted never leads to any. Have the most basic and fundamental of economic properties and relationships so drastically changed, and that drastic change just coincidentally timed to a global monetary crisis twelve years ago, or are central bankers and Economists bending over backwards bending curves, openly trying too hard to evade recognition of the most logical and straightforward explanation?

The answer is obvious.

We need not search for an explanation, either. As Dr. Stapp put it, progress is quite often a miracle itself. Humans are as hardwired to cover for their failures, to any dubious lengths, as they are to honestly move forward toward the light of truth. In one of man’s greatest ironies, you almost have to add the pain of death to make it possible.

The original failure, the Fed’s modern original sin it must forever cover up, is money itself. When central bankers and Economists realized they could no longer define it, and this was more than a half century ago, they came up with what they believed was progress. The post-Great Inflation Fed, the Volcker era, was one in which policymakers supposed they’d never have to figure out the monetary details. 

The dirty work would be left to the banks. The only act the central “bank” needed, then, was to signal to the banks what it wanted them to do and let the banking system sort out the particulars. Simple. Elegant. And dangerous.

Not only were central bankers warned when this shift took place that it would be irresponsible, and the likely consequences of such dereliction potentially momentous, some of the most famous proponents like Alan Greenspan worried how they’d not only end up fooling the public but themselves along with every layperson (his famous 1996 “irrational exuberance” speech a perfect example of the “maestro’s” gross monetary concerns).

August 2007 and thereafter was simply those consequences finally arriving. Contradicting also Keynes, in the long run someone really would have to pay for a system in which central banks are not central and don’t do money. As it turns out, the costs have been born by the whole global economy as it has been deprived for thirteen years of enough necessary monetary oxygen to make things work.

Including the lack of inflationary success at each central bank target, no matter each central bank “money printing” session.

Central banks don’t do money. They are not central. This fact, yes fact, has dawned on broad swaths of the financial markets, which explains why for all the hoopla and hype surrounding the Jackson Hole reveal of the Grand Strategy Update, and its gigantic inflationary commitment we were told it represented, the spectacle went off with less than a whimper. Even in stocks.

Like their view of the Phillips Curve, you could honestly say it fell flat. I smile only briefly for such true progress.

Worst of all, though, the great Americans who toiled at the California test tracks suffering under the most brutal conditions for the benefit of humankind did so without any need nor expectation of ever being hailed as the heroes they really were. They remained honest, as honest as they could, and pushed forward knowing the consequences of even the smallest setbacks would be felt very near and dear.

Success was big, and hard-won, because no matter what, if it could happen, they were already thinking about it no matter how uncomfortable it might make them, no matter how much it harmed their personal views and reputations. These scientists didn’t wear white lab coats and sit under academic instruction, they wore blood and pain conducting their work in the gritty trenches of the real world.

Nowadays, detached entirely from any accountability whatsoever, we are supposed to call Ben Bernanke, Janet Yellen, and Jay Powell heroes. For what? From the very start, these are all acts of intellectual cowardice, a bankrupt foundation so perverse it is an embarrassment to science itself; becoming ever more so with each additional stab at everything but the truth. Anything other than that.

They’ve perverted Murphy’s Law into a third version, a specific version. Fed’s Law is now this: monetary policy will never go wrong, so everything else will.

As it has. And it is.