Economic Narratives

Many of the most powerful narratives in the modern industrial world comes from the thinking on and beliefs about economics as they are made manifest through it's life partner, politics.  I named this post "Economic Narratives" rather than "Political Narratives" because looking at economics gets closer to the origin of big ideas that drive politics and, increasingly, causes political activity to grind to a halt.  The chain of being follows this course:  Economic theory feeds political ideology, which feeds political positions.  Political positions on a nationwide basis are, as of this morning, locked into place in some sclerotic and unimaginative pit of history.  This is the fruit born from the economic narratives formed over the course of the last century that today have lost their currency, so to speak, here in the early twenty-first century. 

The political-economic rhetoric swirling around is familiar enough:  No new taxes, tax and spend liberals, government spending is the problem on the right; inequality, wealth distribution, or demand side (usually government) stimulus on the left.  I'm not going to get into the merits of these positions.  There is a universality to them, after all, and reflect moral or ethical values as much as they reflect real economic thinking.  It's the economic thinking used to justify political-economic positions that I question.  I'll use two examples to illustrate what I mean.

Back in the summer of 2007 I was listening to an interview with Paul Krugman, nobel prize winning economist and liberal hero.  At the time I regarded him as a liberal hero but have come to see him as another misguided economist.  In the interview he slammed the Bush economy, which was fine with me, but at the end of the interview he was asked by Minnesota Public Radio's Kerri Miller if the country was headed towards a recession.  His answer was 50/50, meaning he did not know whether it was or wasn't going into recession.  He did not identify or foresee what, a year and a quarter later, was the bursting of the largest financial bubble in the history of humankind.  The recession Miller asked about was later determined to have started in January of that year, six months before the interview.

In the wake of the stock market crash in October of 2008, a very fundamental debate blazed among the market watchers, participant-observers, and opinionators.  Call it the Great Inflation/Deflation Death Match and the tangle burst out in response to the negative feedback loop of government market intervention to bail out the banks and subsequent Federal Reserve action involving what's commonly known as Quantitative Easing (QE). The interesting thing about this debate, which has fairly well subsided by now, is that the divide over whether inflation or deflation was the primary concern reflected almost perfectly whether you were a conservative or a liberal.  There were some notable exceptions to this, but overall that was the case.

The inflation argument came from the conservative side, especially from the libertarian wing.  You'll recall the shrill, panicky predictions that the U.S. would end up like Zimbabwe or Weimar Germany, with folks needing wheelbarrows of money to buy toothpaste.  The likes of Glen Beck peddled gold to the faithful so as to protect yourself and your loved ones against the fanatical and reckless policies of the Fed.  Even more sober minded folks than Glen Beck believed the inflation story, even the hyperinflation story, warning about the risk the dollar's value would plummet to depths rarely seen in history.  As we have seen, the apocalypse didn't come in the form of hyperinflation.  At best, the results have been mixed, but deflation has been the primary underlying condition of the economy since 2007.

The deflationists had the better read on the situation.  The deficit spending by the government, reached as high as $1.5 trillion dollars at one point, but did not cause inflation.  The Fed's QE efforts, which in total has poured around $5 trillion dollars into banks, did nothing to cause inflation, let alone hyperinflation.  The screamers from the right clearly missed something here.  Why were they so wrong?  And will they ever admit they were wrong?  They were wrong because the beliefs they subscribe to don't accurately reflect how banking works, the nature of the Fed actions, or the nature of the crisis itself.  Ben Bernanke was right not to fear inflation, at least for now.

To be fair, Krugman was not alone in failing to predict the financial meltdown of 2008.  Among economists worldwide, there were only ten economists or financial actors on record to have accurately predicted the market crash and for the right reasons.  That's out of roughly 30,000 economists around the world who fit the description.  Steve Keen, an academic economist out of Australia, won an actual prize for his prediction because his analysis was deemed the most accurate of the ten.  He has since railed against the economic models used in academia and everywhere else that matters, pointing out that the reason nobody predicted the biggest market event of our time was because the models everybody (really, everybody) uses cannot predict what happened.  He says it's not possible to run the scenario that actually happened using conventional (neoclassical) economic modeling techniques. I find that interesting.

The two examples I used represent two major principles of economics.  Inflation and deflation is fundamental to understanding how money operates.  The larger concern is the predictive power of economics as a science.  Economics is well-known for it's weighing so many complex factors (on the one hand, on the other, and then on the third hand, etc.), that the probabilities almost preclude accurate forecasting.  It's the same reason forecasting the weather is so hard.  They have to content themselves with being mostly right.  C'est la vie.  For the weatherman, the weather will at least do something weatherlike.  For the economist, economic growth is the weather.  The global economy today is on the order of ten times bigger than the global economy of 1950.  The assumed natural order is growth, and to contemplate a shrinking economy is to peer into the forest primeval of crap outcomes.  It is not in the mind of an economist to consider the possibility that the economy could stop growing, let alone will stop growing, permanently, for reasons they haven't considered simply because it's not in the models.

Growth defines the narrative we have in our collective brains.   

The market is down today.  Bad news is bad news again for the stock market, apparently.  Both Japan and Europe seem to be headed for the "triple dip" recession and this is indeed bad news.  Janet Yellen, the new Fed Chief, has taken her foot off the gas peddle of QE and now prices are rising around the world as the dollar strengthens and drives prices lower in America.  But this smells like overall deflation.  The price of oil is dropping because of demand weakness, breaking through the price floor.  The global economy has lingered in a holding pattern of slow growth, gently rising and falling around an uninspiring barely positive rate for about four years now.  The previous drivers of global growth, the so-called BRIC's (Brazil, Russia, India, and China) have all slowed considerably.  It sure looks like we are entering a new worldwide recession, and we have many fewer bullets, financially speaking, to try to kill it. 

This could be the stirrings of a phase change in the ongoing march of the global economy.  The swings are widening, foretelling a destabilized financial environment (remember the debt).  And there's nothing markets hate more than a destabilized financial environment.

Here are some pertinent links.

http://www.bloomberg.com/news/2014-10-09/ceos-tout-reserves-of-oil-gas-revealed-to-be-less-to-sec.html

http://www.cnbc.com/id/102076504

http://www.cnbc.com/id/102073512