[macro-economic delusions] part one – follow the history

Part 2 is here.

Robert Lucas, one of the greatest macroeconomists of his generation, and his followers are “making ancient and basic analytical errors all over the place”. Harvard’s Robert Barro, another towering figure in the discipline, is “making truly boneheaded arguments”. The past 30 years of macroeconomics training at American and British universities were a “costly waste of time”.

To the uninitiated, economics has always been a dismal science. But all these attacks come from within the guild: from Brad DeLong of the University of California, Berkeley; Paul Krugman of Princeton and the New York Times; and Willem Buiter of the London School of Economics (LSE), respectively. The macroeconomic crisis of the past two years is also provoking a crisis of confidence in macroeconomics. In the last of his Lionel Robbins lectures at the LSE on June 10th, Mr Krugman feared that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”.

Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.

The central and abiding error these people make is that they argue from a discipline called macro-economic theory, whilst ignoring a simple discipline called:

History.

They refuse to look at the history of booms and busts, who profits from them and who induces them because it does not fit within the narrow focus of modern economics, as taught at the LSE.

By what process of logic would a group like Goldman Sachs not attempt to ensure a cornered market? What sort of business acumen would it show if they not only did not play the system but wouldn’t even create it when they have the clout, the historical precedence and the opportunity to do so?

How long is it going to take economists, even thinking economists such as those at Capitalists at Work, one of the best of its kind, to wake up that the only way to stop these wolves is as follows:

1. Pay off the debt with Treasury backed notes [the old greenbacks in American parlance but the principle is the same in Britain] whilst at the same time raising reserve percentages of the small banks to halt inflation, [in line with population growth];

2. Abolish fractional reserve banking and move, within two years, to full reserve banking, with the issuance of money and control of credit in government hands;

3. In the U.S., repeal the two acts of 1913 and 1864, [it's more difficult over here], with the central banks now acting as repositories for the Treasury;

4. Withdraw from the IMF, BIS and World Bank.

Of course, that by itself would cause tremendous inflation, since our currency is presently multiplied by the fractional reserve banking system.

So, as the Treasury buys up its bonds on the open market, with government notes, the reserve requirements of your local bank will be proportionally raised so the amount of money in circulation remains constant. As those holding bonds in notes, they will deposit this money thus making available the currency then needed by the banks to increase their reserves.

Once all the bonds are replaced with notes, banks will be at 100% reserve banking, instead of the fractional reserve system currently in use.

From this point on, the former CB buildings will only be needed as a central clearing house for cheques and as vaults for notes. Former Acts can now be repealed. Monetary power can be transferred back to the Treasury Department. There’d be no further creation or contraction of money by banks.

By doing it this way, our national debt can be paid off in a single year or so and the CBs, WBs, IMFs and fractional reserve banking can be abolished or will collapse by losing its support base, without national bankruptcy, inflation or deflation or any significant change in the way the average person goes about his business.

To the average person, the primary difference would be that taxes would begin to go DOWN.

Paradigm shift

Without this fundamental shift, the problems will continue to repeat because it is in the interests of those at the helm for them to repeat. It was shown just as CBs pull the plug to induce crisis, so do they allow greenshoots to reappear.

You can build better corrals, you can write a billion words but until you eliminate the wolf, you ain’t gonna be safe – none of yer.

And it’s not as if this was unknown. Note the date of this quote – March 4, 2003:

In the International Monetary Fund's annual assessment of the British economy, it said there was an "appreciable risk" that housing could scupper hopes of an economic recovery. "In particular, domestic demand is being sustained by high and increasing levels of household debt, fuelled by house-price inflation and low interest rates, which increases vulnerability to potential adverse shocks," it said.

Instead of making the paradigm shift necessary to free us of the cycle of misery, economists prefer to trade theories:

If the EMH held, then markets would price financial assets broadly correctly. Deviations from equilibrium values could not last for long. If the price of a share, say, was too low, well-informed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price.

On such ideas, and on the complex mathematics that described them, was founded the Wall Street profession of financial engineering.

One economist leading the effort to define that new paradigm is Andrew Lo, of the Massachusetts Institute of Technology, who sees merit in both the rational and behavioural views. He has tried to reconcile them in the “adaptive markets hypothesis”, which supposes that humans are neither fully rational nor psychologically unhinged.

Instead, they work by making best guesses and by trial and error. If one investment strategy fails, they try another. If it works, they stick with it. Mr Lo borrows heavily from evolutionary science [oxymoron if ever there was one]. He does not see markets as efficient in Mr Fama’s sense, but thinks they are fiercely competitive. Because the “ecology” changes over time, people make mistakes when adapting. Old strategies become obsolete and new ones are called for.

You can see that they're going to miss the bus yet again. Thrashing around blindly, trying to reconcile orthodox macroeconomics with new synthetic theorems will not alter the simple political fact that monopolies control the CBs and not by accident.

Look at American history because there are some wonderfully transparent examples there. If a mob can stomr Biddle’s house in 1838 for inducing the crisis, why can’t today’s public be equally perspicacious?

There are elements of truth in this:

The truth may be simpler and more depressing: that no economic theory can perform the feats its users have come to expect of it. Economics is unlikely ever to be very good at predicting the future. Too much of what happens in an economy depends on what people expect to happen. Even state-of-the-art forecasts are therefore better guides to the present mood than the future though they may also be self-fulfilling prophecies.

Au contraire – economic theory, such as that followed by the wolves is centuries old and has served them well – their own theory of induced cycles. It’s a self-fulfilling prophesy kept in-house and worked towards to ensure the ongoing hegemony of the old money.

Economists are going to sidestep this post and say, “What would he know? Where’s his LSE qualification? Sheesh – he doesn’t even speak the lingo.” They're going to look at the "unworkable and idealistic oversimplification" in the four points above and smile indulgently. Therein lie the origins of our demise - the inability of our economists to think more laterally about true causes of why we're at the mercy of the usurers.

Everyone and his dog has his own theory - make tax goods based, make it income based, introduce CBI - none of it can have any lasting effect if we continue to play down the very real role of the global money, the old money and its source.

Unless economists really do want the general acceptance among the population of the globalists' "it's capitalism which caused this" cry, unless they want the financial markets even further regulated but by the wrong people, then they need to get on board with radically fundamental economics ... in other words, simple common sense.

Just as Deep Throat urged, “Follow the money,” so I and many others urge, “Follow the history.”

We can't make the change? History does not agree with that objection.

Part 2 is here.