Tuesday, May 26, 2009

Economic Stimulus: Part 1 – Economists & Witch Doctors

I am not an economist. I am also not a witch doctor. The two professions are roughly equal in usefulness. Witch doctors predict, diagnose, and treat human illness with approximately the same success economists predict, diagnose, and treat national and global economies. They are as successful as the local weatherman predicting a thunderstorm over your home for 2:00 PM six weeks from next Monday.

Macro-economics is Voodoo economics to resurrect a phrase from the 1980’s. The economics that matter are the incentives, costs, benefits, and decisions taken by individual and corporate actors. Government is just another corporate actor. Its decisions influence the incentives, costs, benefits, and decisions taken by other individual and corporate actors.

Government policies potentially affect more people than those of other actors because government is by far the largest corporate actor in the economy. But economists pretend they know what will happen as a result of government policies despite their record of being wrong 100% of the time.

They don’t know what the unemployment rate will be next month. Why do you suppose economists every month anxiously await the government published numbers? Why are they always surprised that the result is worst than or better than expected?

They don’t know what inflation will be next month.

Markets swing when almost any economic statistic is published because whatever the actual number is – it is different from what was expected. And oh, by the way, the “actual” number that was reported yesterday morning will be “revised” upward – or downward –retroactively in three months time. The current recession was officially announced last fall, in September 2008 as I recall. It was then announced that the recession began in December 2007; a surprise and a retroactive correction of the data.

Why does anyone believe professional economists? For the same reason that the tribe believes the witch doctor – they don’t know any better. The witch doctor looks really competent in his headdress, made-up face, leggings, and sheep skin cloak. He looks like he really knows what he is doing as he dances around the sick bed chanting rhyming incantations. The tribesmen don’t know those incantations. They don’t know those dances. They don’t own a sheep skin cloak.

And we don’t understand those macro-economic formulae. We don’t even understand the words uttered by professional economists, But they sure sound like they know what they are talking about. Universities even gave them all sheep skin PHD diplomas. Some of them even won Nobel Prizes. They KNOW more than we do.

For some reason – the tribesmen don’t know why – the sick person gets well, or doesn’t, whether the witch doctor is there or not. And for some reason - we don’t know why – the economists are always wrong. The world seems never to work according to their models – any of their models. Regardless of which of the many conflicting economic models you consult they are always wrong.

So is economics worthless? Not completely. If you use common sense and concentrate at the micro level where real people are making real decisions about their own real lives then you can get some insights into reality. Perhaps, if you are very careful and through, you can aggregate some of the real decisions and infer a few general principles to guide public policy but no more than that.

Warren Buffet recently said, “Beware of geeks bearing formulas.” His quip is insightful and universally applicable. All academic disciplines trend toward ever more complex mathematics in their attempt to explain data. Before any mathematical model can be relied upon for decision-making it must be rigorously tested by reality and by smell.

Correlation does not equal causation or even connection.

Links to Other Topics in the Special Report: Economic Stimulus

Wednesday, May 20, 2009

Inflation is Coming

Inflation is coming. Serious inflation like we have not seen since the days of Jimmy Carter.

The United States Treasury is borrowing money from overseas and the Federal Reserve Bank is creating money out of thin air; Lots of money; Mind-numbing quantities of money.

The sum total of all goods and services produced in the United States has fallen every quarter since the end of 2007 and it continues to fall.

The prices of oil, gold, and copper are slowly rising from their recent lows. Yields on long term Treasury Bills are rising as well, moving from less than one percent to over three percent in six months.

Whether fiscal stimulus will increase or retard economic growth is unclear. What is clear is that a lot more money will be available to spend or a lot fewer goods and services. This is practically the definition of inflation. I don’t know when it will start – perhaps it already has. When inflation gets started dollars will become worth less.

Inflation may be the only way out of the excessive personal debt load carried by millions of Americans. It will reduce the value of debts and tend to increase wages making the debts more affordable. That’s the good news.

It will also make most things cost more. Adjustable Rate Mortgages (ARM) will reset upward as inflation inevitably raises mortgage interest rates. It will make doing business more complicated. Some businesses will fail because of their inability to raise prices as fast as their costs increase. It will erode the value of savings and annuities and give the United States government a way to reduce Social Security and Medicare benefits on the sly by increasing benefit levels more slowly than the real rate of inflation.

Inflation is coming. Get ready.

Link to Featured Posts

Wednesday, May 13, 2009

Liberty is Radical – Part 4 – States Rights

The second meta-decision at issue in the Civil War was the meaning of the Constitution’s 9th & 10th Amendments.

The 9th & 10th Amendments are shown below along with a link to a copy of the entire Constitution.


Amendment 9 - Construction of Constitution.
“The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”

Amendment 10 - Powers of the States and People.
“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

The Confederate States, in defense of slavery, asserted their right to secede or withdraw from the United States of America and form a new country with laws more to their liking.

The United States invaded the Confederate States and the eventual success of the Northern invasion ended slavery – clearly a good thing. But it also ended the then universal assumption that the power of the Federal government was limited by the 9th and 10th Amendments to the US Constitution. And, that the states had the right to secede from the union they had voluntarily joined.

The balance of US history from 1865 to this day reveals a continuous growth in the powers of the Federal government and ever tightening constraints on the rights of States and of individuals.

If you don’t believe me try any one of these tests:
Carry a belt knife into the security zone of an airport.
Protest in front of an abortion clinic.
Upgrade the windows of a house in a designated “historic district”.
Drain a swamp and prepare to build a house on the land.
Refuse to rent an apartment to a homosexual couple

Though you may agree with these restrictions they are, nevertheless, restrictions of liberty. Liberty is in retreat and has been for a very long time. How long will it continue? How much liberty is enough? How much is too much?

Friday, May 8, 2009

I Love My Wife

I am in love with my wife; insanely, outrageously, totally, completely, wonderfully in love with my Linda. We’ve been an “item” for ten years and married for most of nine.

We’ve had good times and bad times but I’ve been blessed through all the times.

It is wisely said that the most important decision you’ll ever make is your choice of a spouse. I affirm that wisdom. Your choice of a woman to wed will make the difference between bankruptcy and plenty; between a clean orderly home in the mountains and an insect infested fire trap; between companionship and loneliness; zest for life and thoughts of suicide; between peace and chaos; between heaven on Earth and Hell.

Linda is not perfect – nor would she claim it. I, however, am far less perfect than she but she stayed with me nevertheless. She was my partner in recovering from bankruptcy. We fought for a year over the design of our new house and in the end; the design was perfect for what we could afford.

Does she nag me?
Of course.

Does she support me?
Of course!

Does she love me?

Do I love Linda?

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Monday, May 4, 2009

Torturous Caterpillars

Memos were recently released by the Obama administration detailing the interrogation methods used on some captured terrorists during the Bush administration. Among the techniques described were “waterboarding”, “walling”, and confining the terrorist in a closed space with a caterpillar.

Walling seems to consist of pushing the terrorist up against a soft wall while the terrorist is wearing a neck brace to prevent injury. As a 1973 West Point graduate walling sounds like an extremely mild form of “bracing” a plebe. My class was officially the last class to experience bracing, but it used to be that freshmen West Point cadets were regularly braced against walls by upperclassmen. The plebe was required to push his neck back against the wall without the use of a neck brace and hold it there by his own strength for extended periods of time.

Confining a terrorist in a close space with a caterpillar, even if the subject thought the caterpillar was a “stinging insect”, hardly qualifies as torture. Waterboarding is a bit more strenuous but this, the most extreme of the interrogation techniques used, is just not in the same league with cigarette butts on the skin or electrodes on the testicles.

In fact the most amazing thing about these interrogation techniques is that they worked! If I were a Muslim or an Arab I would be ashamed that those who pretend to represent me are such cowards that they spill their guts in fear of a caterpillar.

Just what kinds of “warriors” are bred over there? Cowardice doesn’t begin to describe their capitulation; when they see a caterpillar, when they are braced against a wall, or when water is poured on the faces.

It is just astounding.

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