Magical Thinking

September 1, 2016·4 comments·Money

Central banks have spent years repeating the same incantations, tweaking their formulas, insisting that the right words spoken at the right time will control inflation and growth. The formulas promise control over invisible economic forces. Yet the banana plants keep dying anyway, and nobody asks whether the spells ever worked at all, only whether they were cast loudly enough.

The priest-kings admit the game is theater. A Fed official explains that interest rate decisions are just negotiated trade-offs: "hike today and delay later" or vice versa. There's no underlying logic, just consensus-building through political compromise disguised as monetary science.
The spells worked until they didn't. The Gaussian Copula promised mathematical certainty that mortgage securities were safe. Interest rate formulas promised control of inflation. Both delivered stability for years, then collapsed because they never addressed the actual underlying forces.
When the spell breaks, the response is always the same. The priest-kings don't abandon spell-casting. They cast harder, rewrite the incantations, change the secret words from "inflation" to "nominal GDP growth" and try again. They will never acknowledge that spells don't work.
The alternative is worse, so we all stay quiet. Societies accept magical thinking because the alternative is admitting we can't control anything. The moment people lose faith in incumbent spells, populist alt-priests arrive with different magic. And history shows some of that magic is genuinely evil.
The fatal flaw is that we've lost the ability to imagine solving problems without state magic. When monetary spells fail, we don't ask whether we need fewer spells. We ask for fiscal spells instead. We've surrendered the possibility that the real solution might be doing less state-directed action, not more.

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Comments

siffcapitalabout 7 years ago

At least part of the problem here is that most of society finds the comfort created by artificially deferring the inevitable is preferable to confronting reality. Most of society prefers to work less (or better still, not at all) than to use tech and innovation to boost productivity, and nobody is structurally motivated to set us on a different course. Our reliance on magic spells provides the alt-priests with a source of power, which they like, and a basis for paternalistic overlord-like behavior, which they also like. As long as this setup also suits those holding political power, it’s hard to see any catalyst for change until some fairly disastrous consequences fall upon our economies and society. Then, after some period of extreme social and economic pain, everybody will forget and it can all start over.

lpusateriabout 4 years ago

Amazingly enough, the U.S. can still grow its way out of the massive debt we’ve taken on. I know … hard to believe. But it’s true. The power of compounding is truly inexorable, and it’s amazing what a steady 3.5% growth rate on a huge economic base can do to make manageable even trillions of dollars in debt.

Ben just wondering if you think this is still true ….it’s hard to believe it’s been over 5 years since I first read this note

BScalettaabout 4 years ago

On the same line, isn’t the US national debt actually a US national asset? Paying off the national debt would actually be the destruction of money. A 3.5% growth rate would just mean the national debt could grow larger. The US isn’t going to grow its way out of massive debt, it will grows its way into more debt. If stuck at 1% or 2%, then no more debt growth? I’m not sure, I think I have Lacy Hunt’s diminishing rate of return on debt in my head.

handshawabout 2 years ago

Ben,

lpusateri brought this to our attention on the Financial Nihilism thread… I’m taking the liberty to move it up.

The original three commentators offer hope. We can grow out of this. Lacy Hunt’s commentary over the last ten years, imo, MAY, somehow be tweaked to use debt for increasing returns.

We’re using debt for all the wrong reasons.

Jim