On The Failure Of Inflation Targeting, The Hubris Of Central Planning, The "Lost Pilot" Effect, And Economist Idiocy

As an ever greater portion of the world succumbs to authoritarian control (whether it is of military disposition, or as we first showed, a small room of economists defining the monetary fate of the future as central banks now hold nearly a third of world GDP within their balance sheets) we can't help but be amazed as the population simply sits idly by on the sidelines as the modern financial system repeats every single mistake of the past century, only this time with stakes so high not even Mars could bail out the world. Unfortunately, with the world having operated under patently false economic models spread by hacks whose only credibility is being endorsed by the same system that created these models over the past century, the only temporary solution to all financial problem is to "try harder." Sadly, the final outcome is well known - a global systematic reset, in which the foundation of all modern democracies - the myth of the welfare state (which at last check, was about $200 trillion underfunded on an NPV basis globally and is thus the most insolvent of all going concern entities in existence) is vaporized (there's that word again) leading to global conflict, misery and war. Sadly that is the price we will end up paying for over a century of flawed economic models, of "borrowing from the future", of ever more encroaching central planning, and of an economic paradigm so flawed that as Bill Buckler puts it, "Keynes’ response to those who questioned the “longer-term” consequences of his advocacy of credit-creation as a basis for money was - “In the long run, we are all dead”. It is difficult to overemphasise the venal arrogance of this remark or the destructiveness of its legacy." Alas, the last thing the central planning "fools" (more on that shortly) will admit is their erroneous hubris, which in the years to come will claims millions of lives. In the meantime, we can merely comfort ourselves with ever more insightful analyses into the heart of the broken system under which we all labor, such as this one by SocGen's Dylan Grice, whose latest letter on Popular Delusions is a call for "honest fools" - "Frequently, when we make mistakes we try to correct them not by changing the flawed thinking which led to the mistake in the first place, but by reapplying the same flawed thinking with even more determination. Behavioural psychologists call it the “lost pilot” effect, after the lost pilot who tried to reassure his passenger: “I have no idea where we’re going, but we’re making good time!” Policy makers on both sides of the Atlantic are treating today’s malaise with the same flaky thinking which created it in the first place. How can that work?" Simple answer: it can't.

Grice explains why "Trying harder" is the only recourse of a status quo gripped in a confirmation bias so tense that even merely glancing outside the window at the Marriner Eccles building could be sufficient grounds for the whole house of cards to come tumbling down:

[This week I want to think about] the incorrect application of faulty models. In essence, that's all those studies on confirmation bias are really about. Subjects applied a faulty model - a mental algorithm saying "accept only supporting evidence" - which resulted in a biased assessment of the evidence. "Trying harder" didn't work because the problem was the faulty model, not the lack of effort, and applying that faulty model with more determination just caused an even bigger error. Psychologists have a name for this. They call it the "lost pilot effect" after the lost pilot trying to reassure his passengers by saying "I have no idea where we're going, but we're making good time!"

Flawed thinking got us into this mess. But rather than change that flawed thinking, our policy makers are applying it with even more rigour: we have more debt for insolvent borrowers, more financial engineering, more complicated banking regulations, more blaming speculators for everything, more monetary experimentation by central banks. Our policy makers have absolutely no idea what they're doing, but they're giving it a go!

"Lost pilot effect" exhibit A - Inflation Targeting, which failed miserably in the past, and will fail miserably again.

The latest from the Fed provides a wonderful example. Undeterred by the latest calamitous failure of CPI targeting regimes (a brief history of which will be presented below), it has announced an explicit 2% inflation target. But why? Would an explicit target have made any difference to the last crisis? Will it prevent the next one? And where did this 2% come from? We don't know. But we suspect that past uninformed capital market tinkering has failed to control the uncontrollable, and we're pretty sure these ones will too.

In fact, if such tinkering has in the past been the primary causes of crises, then why won't this latest attempt - the 2% inflation target - be the cause of the next one? There are certainly precedents. Targeting stable "prices" isn't a new idea. The first experiment was actually conducted in the US in the 1920s, apparently successfully. Indeed, so stable were consumer prices that the authorities assumed there was no inflationary threat. And, this brilliant new idea, that stable consumer prices were both a necessary and sufficient condition for economic stability, proved so appealing that the NY Fed adopted it as a policy objective. On January 11th 1925, then-governor Benjamin Strong wrote to a friend:

That it was my belief, and I thought it was shared by all others in the Federal Reserve System, that our whole policy in the future, as in the past, would be directed towards the stability of prices so far as it was possible for us to influence prices.”

During the 1927 Stabilization hearings before the Committee on Banking and Currency on a Bill to amend the Federal Reserve Act to provide for the "stabilization of the price level for commodities in general", the governor was asked if the Fed could stabilize prices more than it had done in the past. Strong replied “I personally think that the administration of the Federal Reserve System since the reaction of 1921 has been just as nearly directed as reasonable human wisdom could direct it toward that very object.”

Like a driver focused on the speedometer rather than the speed, oblivious to the risk that the speedometer might be faulty, they kept their foot on the gas until they crashed. So focused were they on the stability of the CPI (first chart below), and so convinced that it was the be all and end all of inflation, they missed what was going on in the credit markets (second chart below).

Oddly enough, nobody discussed "inflation targeting" as one of the potential causes leading to the Great Depression. Why? Simple. Because it would confirm that the status quo's very basic definition of inflation is fatally wrong; it also means that the entire premise of "economy" is a joke as it is impossible to rely on any of the most "sacred" indicators in existence, and all the so-called economists are literally pilots, flying blind. Grice on just this possibility:

We know that episode didn't end too well. Yet to this day, on the long list of explanations for what put the "Great" into the 1930s Great Depression, the prior credit bubble which was allowed to develop - and was possibly even caused by the monetary authorities' undue attention to an arbitrary variable (consumer prices) - and the false sense of security the stability of that variable created, is barely a footnote. Amid the mountains of literature on the "lessons from the 1930s" there doesn't seem to be much on the danger posed to an economy of allowing a committee of economists to tamper with the natural functioning of the market for capital by letting them decide what interest rates should be.

Why would there be? It would be a confirmation by the same status quo it is based on a completely flawed premise. Yet the blind reliance on CPI did not prevent the Japanese bubble of the late '80s, when the Nikkey quadrupled in 5 years, yet Y/Y CPI was under 3% the entire time. Same thing with the Nasdaq bubble:

We've experienced the same thing with the tech bubble of the late 90s and the real estate bubble we're still recovering from (see charts below). On each occasion, the monetary authorities were blinded to the runaway inflation in the markets for equities (first chart below) and real estate (second chart below) by stable CPI inflation.

Inflation targeting, it seems, has a history of fostering asset bubbles because the notion that a stable CPI equates to a robust economy contains numerous false premises.

And here we reach the two main errata in all of modern economics.

The first is that inflation is measurable. Einstein once had the words “not everything which can be measured counts, and not everything which counts can be measured” on the desk in his office at Princeton. And although the world might be simpler if it wasn't so, I believe "inflation" happens to be one of the things which counts but can't be measured. The fact is that once money is created you don't know where it ends up. Maybe it will end up in the consumer goods market, maybe it won't. Or maybe it will be multiplied via the financial system into new credit which will inflate asset prices instead. Even then, we don't know which assets.

But suppose we did know where money would end up, how would you weight the assets together into one index? Should stock prices be included in the CPI? If so, what should the weight be? And if you're going to add stocks, why not add corporate bonds too? And what should their weight be? And if you're going to add bonds, why not add house prices, etc., etc.? Isn't it obvious that the rich concept of - inflation - is unobservable? So who said that proxying it with a narrow sub-category - consumer prices - was a good idea?

Why Ben Bernanke of course, that's who.

The second is the premise that consumer prices themselves should be as 'stable' as possible. But is that correct? Isn't the natural tendency of our species to do more with less, to lower the cost of a given good or service, to "increase productivity"? In other words, isn't "deflation" a part of the human condition? Jeff Bezos, the CEO of Amazon famously said there were two types of company in the world, those that work to charge more and those that like to charge less. His company, he said, would belong to the second group.

Shouldn't someone warn him of the folly of pursuing deflation? Of the untold havoc he's set to unleash by trying to undercut Apples iPad? And how about those guys at Walmart? Surely they deserve a stern ticking off oblivious, it seems, to the downright irresponsibility of their "Everyday Low Prices" strategy? Maybe all the clever economists and Ivy League Nobel Prize winners should make going to Arkansas to explain to the Waltons that they're playing with fire a matter of urgency?

Some more on the self-deception of hubris:

Or maybe the clever economists aren't so clever. Maybe they have it all wrong. Maybe deflation is most painful when there is an excess of debt, and so maybe they shouldn't be encouraging excessive debt accumulation in the first place, by distorting the interest rate market in the pursuit of aims whose consequences they don't fully understand?

This brings us to a third false premise, that there is some "optimal" rate of consumer price inflation. Judging by the targets of most central banks which have them, that rate is around 2%. But why is it 2%? Why not 3%, or 4%, or 6.78384%? What's so magical about 2%? Where did that number come from?

Grice on exposing faux experts (virtually all of them) using the methodology of one Richard Feynman:

One of my favourite people of the 20th century is Richard Feynman, the Nobel Prize winning physicist who, among other things, pioneered the study of quantum electrodynamics. In a fantastic documentary about him for BBC's Horizon show called "The Pleasure of Finding Things Out" he said something I found moving and profound. He was talking about the "experts" he saw on TV and how although he didn't have any expertise in the area they claimed to have expertise in, he felt quite sure that they didn't know what they were talking about. He said this:

"There are myths and pseudo-science all over the place. I might be quite wrong, maybe they do know all this ... but I don't think I'm wrong, you see I have the advantage of having found out how difficult it is to really know something. How careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can't believe that they know it. They haven't done the work necessary, they haven't done the checks necessary, they haven't taken the care necessary. I have a great suspicion that they don't know and that they're intimidating people."

So if I apply Feynman's test and ask myself how hard most economists worked for their knowledge, I can't help thinking they haven't worked hard for it at all. I don't think they've worked hard to know what inflation is, or whether it can or should be targeted. I think they've just assumed it, and anyone can do that. As Feynman warned, they've fallen into the trap of fooling themselves. They've assumed that inflation can be proxied by the CPI because it's easier to do that, they've assumed that 2% is somehow the right rate for it, and they've assumed they're capable of setting interest rates at the 'appropriate' level.

And the biggest blasphemy of all: everything economists have been taught, and have taught, was wrong from the very beginning.

But what if those assumptions are wrong? What if, for example, the 'natural' rate of consumer price inflation was 0% and so by trying to keep it at the unnaturally high rate of 2% they've had to artificially goose up the rest of the economy by setting interest rates at an inappropriately low level? And what if, like force-feeding steroids to a horse because you assume it should be running faster, in doing so you kill it, distorting the credit system so grotesquely as to crash the rest of the economy?

They've assumed that wouldn't be a problem, and they assumed that if there was one they'd be able to fix it (Ben Bernanke supposedly promised Milton Friedman that there would never be another great depression because the "lessons" had been learned from the 1930s). But, assuming you know how the animal behaves isn't the correct way to go about attaining knowledge about how the animal actually behaves. So they don't attain knowledge about how the animal behaves. So the animal keeps mauling them.

But they keep doing it. Now a 2% CPI inflation target is going to make all the difference. And I find it a very strange thing. I just don't understand why they're so sure they know all this stuff despite all the evidence to the contrary. I feel like McCarthy in One Flew Over the Cuckoo’s Nest: “That’s right Mr. Martini, there is an Easter Bunny.”

Finally, we get to the bottom line: economists, and all those others who are "in charge" really are just a bunch of idiots, or, as Grice puts it far more politely, fools.

Mr. Feynman said something else which I like. He said:

“Ordinary fools are all right; you can talk to them, and try to help them out. But pompous fools - guys who are fools and are covering it all over and impressing people as to how wonderful they are with all this hocus pocus – that I cannot stand! An ordinary fool isn't a faker; an honest fool is all right. But a dishonest fool is terrible!”

Yet we keep on giving them Ivy League tenure, and voting them into power...

It's is probably a bigger shame that the general public continues to refuse to call them out for their endless barrage of lies. Because the time has come to unmask the emperor as not only being naked, but being full of, well, shit.

What's this nonsense about the financial system repeating "every single mistake" of the last century? These aren't mistakes at all. If one were to take an impartial view of the last century, one can't help but note that the financial sector rose to global dominance. "Mistakes"? No.

Calling these events "accidents" or "mistakes" is to give the resolute march towards absolute imperial domination the moral neutrality of human error. This is a battle. And the constitutional republic and the associated laws which protect the rights of individuals are being annihilated by a small group who are close to achieving victory.

Their victory is our subjugation, and their prize is generational dominance. (Both of which, one must note -- have already been acheived for the most part. What happens next is really just the tortured aftermath).

There have been no "mistakes" made by the financial elite.

By "mistakes", do you mean the process of first inflating the value of assets to historically fraudulent levels (which made "them" rich on a historic scale), and then the fleecing of *everyone else* rather than see asset values collapse (which kept them rich, in generational terms)? Oh yeah, that mistake.

If that sounds like a "mistake" to anyone, you've got a very creative imagination. That's kind of like "accidentally" fucking the prom queen.

The only "mistake" they can possibly make at this point will be to push too hard. Because history is *extremely* clear about what happens to elites who play their hands too far.

Sorry, this is long post. With questions about voter fraud in Nevada, and the main fucked up media telling us RP got third with only %70 votes counted. Here is clip from last nights rally in Minnesota. First time I see him make points clearly. Anyone who sees this clip will want to vote for RP. Maybe you have to buy sick and tired friends a good scotch for them to watch.

And here is comment from the DailyPaul Forum. “We need to become those who make the rules”

“With our numbers growing we need to listen what Ron Paul said 4 years ago in MN. He said, "If I became president it wouldn't matter; if i'm the only one. If you want to change government you have to become government. If we would all just work together we could take over the GOP in one to two election cycles".

The Neocons took over the GOP in 2000 there is no reason we couldn't take over the GOP in 2012 election cycle. Since 2000 I have taken over two districts and when I took over the first district I made a small change. When officers were being elected for each of the 30 districts a nomination committee of 5 would be elected, no one ever showed up for that election. Then those 5 people would choose who would be on the ballot and only put one name forward for each elected officer such as chairman, 1st vice and so on. Sure you could run from the floor but it is hard to win an election if your name is not on the ballot. So when 9 of us took over a district that represents over 125,000 voters we changed that. If anyone wanted to run and was qualified to run, they were on the ballot. Then I took it state wide and changed it for the whole state.

The bottom line is, if we don't like the GOP's unfair rules, then we need to become those who make the rules. It is easier then you might think. Sure we have to organize and work hard, but in a primary state like AZ we only have to get about 30 people in each of our 30 legislative districts to take over the whole thing. I know each Ron Paul supporter out there can recruit 5-10 each that would become a PC even if that person is not involved in politics.

I fear most of the Ron Paul supporters will do the same thing they did last time. "we didn't win, they didn't play fair, I'm taking my marbles and going home." Then they register as Libertarian, independent, etc. Like it or not the two major parties control just about everything. We wouldn't be talking about he Federal Reserve among other things if Ron Paul was in the Libertarian party. Why? Because he would have never been invited to the debates......Period! It is much easier to take over the GOP than it is to fight against them. I know many of you are thinking "Well, I'm not going to be a Republican, they are lying, cheating, no good for nothing scum!" That may be true right now, what if we could clone Ron Paul and have him in every precinct committeeman, state committeeman, district chair, county chair, state chair and national chair.......what would the GOP look like then? I think that we would have a Constitutional platform, with fair rules for everyone. Sounds like a pretty good place to be!. We are those Ron Paul clones, we care about the rule of law and the Constitution!!

I want us to organize each of our states to take as many of the voting seats as possible as precinct committeeman and what ever the caucus states voting body is. The Republican party is only a vehicle for us to take back our Country.

For Freedom,
David Fitzgerald
Former Candidate for AZ State House.
Won On Election Night, but lost by 36 votes
(out of over 36,000 votes) 10 days later.
The only AZ State Candidate Ever to
be endorsed by Ron Paulwww.DavidFitzgerald2010.com

Repo markets are a potential channel for liquidity risks, given their systemic importance, inherent leverage, and short tenor. For individual financial institutions that rely on repos as a source of leverage, loss of access to repo financing can both directly undermine funding liquidity and create negative market perceptions about the institution’s financial condition. Repo market disruptions, manifested in increased haircuts, aversion towards certain forms of assets as collateral, or elevated concerns about counterparty risk, can pose broader risks to asset pricing and the functioning of the financial system.

As illustrated in a hypothetical example (see “Repo Haircut Increases: Forced Selling?” chart), increases in haircuts can compel forced selling of the underlying repo collateral. In this example, a corporate bond portfolio requiring a 5% haircut for repo financing would enable an institution to take on a $1,050 exposure backed by $50 in equity, equivalent to leverage of 21 to 1.

Good point. Just speculating here but if a new set of risk assets takes hold in the form of nat gas and cloud computing then providing pricing power can be maintained all that's needed is material growth to take hold and this becomes yet another dog that doesn't bark.

I regretfully interrupt The Greatest Blunders & Bloopers of Fractional Reserve Central Banksters Comedy Special (which could fill a few quadrillion hours of airtime) to re-break some apparently breaking news (whether Panetta is bluffing in some coordinated fashion, who knows):

"High-level foreign dignitaries, including the U.N. chief and the head of the American military, have stopped in Israel in recent weeks, urging leaders to give the diplomatic process more time to work. But U.S. Defense Secretary Leon Panetta has reportedly concluded that an Israeli attack on Iran is likely in the coming months."

The Keynsians are control freaks. As are the lunatics in the State, Justice, and Defense Departments. They must be the ones to write history. It would be innappropriate in their eyes to not be the catalyst behind an unlimited amount of warfare and conflict.

They are enemies of self-determination and soverignty. Pre-emptive wars, economic sanctions, nation building - these are their tools of the trade.

When the shit finally hits the fan because of the policies they and they alone implemented, they tell us "See, I told you so". Making a prediction like "an Israeli attack on Iran is likely in the coming months" is setting in motion a deliberate self-fulfilling prophecy. It also explicitly rejects any hope of compromise or of a peaceful solution, because let's face it, these people are all about winning and thus writing the textbooks in which they'll depict themselves as legends.

In early U.S. history, we remember many of the Founders as very intelligent yet very humble men. The Founders were not control freaks who wanted to dictate to the American people how to live or what to produce. Similarly, they were against foreign interventionism because America has no right to impose its will by force.

What we have now is two plus centuries of allowing our elected leaders to become more arrogant and more narcissistic, culminating in easily the most narcissistic administration in American history. Where has any sense of humility gone? Where is the empathy?

Thirding Popo's excellent piece above. Of course there have been no mis-takes.

That is what makes the rabbit hole dive into "conspiracy" topics so refreshing and liberating and difficult. Because you can un-ravel this thread past NY/DC and Hitler and London (city of) and Venice and Rome and..... it just keeps going.

Someone put up an eye-popping documnetary on Switzerland on you-tube (it's in two part and crazy). Some of the very believable/provable theories are down-right bone-chilling. AS an aside, it's a gun-lovers paradise (most armed and practiced populace in the world of arms anywhere in the world).

So yes, no mistakes, only the appearence thereof and bloody long time-lines and data that we can only wish to lay eyes on.

_______________________________________________________
And the constitutional republic and the associated laws which protect the rights of individuals are being annihilated by a small group who are close to achieving victory.

Their victory is our subjugation, and their prize is generational dominance. (Both of which, one must note -- have already been acheived for the most part. What happens next is really just the tortured aftermath).

_________________________________________________________

The constitutional republic and the associated laws of the US never protected the rights of individuals.

They have favoured groups.

Today, there is a shortage of Indians and Negroes to fuel the Ponzi so the Ponzi has to feed off other types ofpeople who thought they would be immune accross the course of Time from being eaten alive.

That is all. There is no elite vs base in US citizenism as the two have worked hand in hand.

Today is the story of guys who thought they were going to touch the skies climbing on other human beings, and are now forced to realize that because of shortage of human beings to act as ladder material, they are now used as material for the ladder so that other US citizens keep living the'American' dream.

There has been an erosion of nothing since the beginning of the US of A republic. This republic is on the same course as ever.

This US citizen post is once again an echo of US citizen cheap propaganda.

You once again demonstrate your clueless and disingenuous propaganda, which is inherent to your nature as a spitting, nose-picking, side-of-the-road shitting Chinese citizen practicing his Chinese citizenism.

When one finds a turd on the side of the road, one can be assured that a Chinese citizen passed that way --- or an imperialist running dog, which is same thing. Such is the eternal nature of the Chinese citizen.

Yeah, but the old fart savers are currently getting social securiy benefits which my generation won't, so who's getting screwed? I'd say we all are. In fact, the more you believe in the ponzi, the greater you'll be hurt.

You are missing a minor point. By creating an unsustainable economic system, we created an unsustainable society; this was the mistake. For example, the false assumptions behind the economic system can supply enough capital to the energy industry enough to sustain the supply forever is false. There are actually two false underlying assumptions, false assumption one is that the financial industry can sustain energy development IN A RELIABLE WAY even though the requirement for capital is non-linear as we dig deeper for less resources. False assumption 2 is that given enough capital, scientific and engineering innovation will overcome any constraints to exploiting energy IN A RELIABLE WAY; even if it means voiding the second law of thermodynamics. Yet, in practice the current financial regime has supplied energy in an unsustainable way allowing populations around the world to grow to the point that when the energy is ultimately interrupted there has to be a massive die-off; it only takes a few weeks to kill billions of people this way. Capitalism is a reactive way of dealing with the world. It cannot deal with the downstream effects of what is happening now so it creates climate change and can do nothing to stop it, it creates an unsustainable populaton and cannot stop it, it cannot even sustain itself as every ponzi scheme comes to a bad end. The people who created this mess will become known as the greatest criminals in history, whose greed meant the deaths of billions of people.

It cannot deal with the downstream effects of what is happening now so it creates climate change and can do nothing to stop it, it creates an unsustainable populaton and cannot stop it, it cannot even sustain itself as every ponzi scheme comes to a bad end.

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The very idea that mankind will overcome its environment is indeed brought by UScitizenism.

This is how US citizens have justified the massive theft they have committed on various people over the world.

The conclusion is bogus, though.

US citizen economics looks for profits. All those created situations are and will be highly profitable.

In this regard, US citizenism will keep sustaining itself.

The only stop known to US citizenism is depletion of resources.

The only stop is when the resources will be so low that well, it will collapse.

The U.S. is just one more step along the way in a vicious cycle that has existed for at least 3000 years. The only difference is that the consequences now are much greater than in the past. While, we as individuals can talk about this subject is a reasonably intelligent way, humanity taken as a whole has the collective intelligence of brewer's yeast.

The U.S. is no different than Athens, Rome, Hapsburgs, Xerxes Persia, Caliphate, Mongol hordes, Spanish Empires, Aztec Empires, Egypt, China, and on and on. The history of the Philippines goes something like this. Chinese fleet of 500+ ships lands and takes over large chunks of the Philippines. Spanish fleet destroys Chinese fleet and takes over large parts of the Philippines. United States fleet destroys Spanish fleet and takes over the Philippines, Japanese fleet destroys U.S. fleet at Pearl Harbor and takes over Philippines, U.S. Fleet destroys Japanese fleet and takes back the Philippines. Finally, Philippines gets independence for a few years but you know that China is building a fleet ...