“On two occasions I have been asked, “Pray, Mr. Babbage, if you put into the machine the wrong figures, will the right answers come out? …I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.” – Charles Babbage, Passages from the Life of a Philosopher.
Crunching Data to Fix Prices
The fundamental problem facing today’s economy is the flagrant contempt by governments the world over for the free exchange of goods and services and private stewardship of property. Perhaps it is power and control governments are after. Maybe they believe they are improving the economy and making the world a better place for all.
No one really knows for sure. But what is lucidly clear is the muddled disorder modern day economic policies have wrought upon us. You can hardly enter into a transaction without a cluster of intervention mucking with the price of payment.
Taxes, tariffs, wage laws, and subsidies. These all impact prices. But the main culprit affecting prices and trade are central bank interventions into money and credit markets. Relentless actions to control the economy by manipulating money and credit stand the price of everything else on end.
Certainly, government intervention into the U.S. economy is much looser than a Soviet style command and control system. But it does share a common refrain. Price fixing is central to its operation.
The Soviets, armed with their Five-Year Plans and the Theory of Productive Forces, deliberately directed how much wheat should be planted and how much a potato should cost. Conversely, the U.S. approach is mostly hidden from the short sighted view of the average lay person. The Federal Reserve allows the government to bypass the nuisance of tinkering with individual prices…though they still do it through subsidies and appropriations.
In short, the Federal Reserve, an unelected board of appointments, crunches economic data each month and draws a conclusion as to what price to fix the economy’s most important commodity – its money. By doing so all other prices in the economy must change – and distort – to adjust to the Fed’s market intervention.
Guided By Garbage
The Fed believes that by fixing the price of money artificially low, they’ll increase something they call ‘aggregate demand.’ The thesis is that cheap credit will compel individuals and businesses to borrow more and consume more. Before you know it, the good times will be here again. Profits will increase. Jobs will be created. Wages will rise. A new cycle of expansion will take root. Sounds great, doesn’t it?
In practice, however, the results are destructive. While cheap credit may have a stimulative influence on an economy with moderate debt levels, once an economy has reached total debt saturation, where the economy can no longer support its debt overhang, the cheap credit trick no longer works to stimulate the economy. Like applying additional fertilizer to an already overstimulated crop field, the marginal return of each unit of additional credit in terms of new growth diminishes to nothing. In fact, the additional credit, and its counterpart debt, actually strangles future growth.
The experience following the Great Recession is that the abundance of cheap credit floods not into the economy, but into asset prices…grossly distorting them in the process. The simple fact is solving the problem of too much debt by pushing more debt doesn’t solve the problem at all. It makes it worse.
What’s more, the approach of using data to identify apparent aggregate demand insufficiencies and perceived supply gluts is flawed. Unemployment. Gross domestic product. Price inflation. These data points are all fabricated up and fudged out to the government number crunchers liking.
For each headline number there are a list of footnotes and qualifiers. Hedonic price adjustments. Price deflators. Seasonal adjustments. Discouraged worker disappearances. These subjective adjustments greatly affect the results. So what good are they?
Computer programmers are familiar with the term garbage in garbage out. Meaning, computer outputs are only as good as the data that are input. If garbage data is input the resulting outputs are garbage. The point is the radical monetary policy interventions being employed by the Fed to somehow improve the economy are being guided by garbage.
Garbage In Garbage Out Economics
The classical economists recognized that economics, as a field of study, is not a stationary system to be engineered and improved upon. Rather they understood it is a natural and dynamic system that can flourish when given the proper conditions. Generally, these conditions include private property rights, a stable money supply, and minimal government interference including free trade, low taxes, and balanced budgets.
Thus the goal of economists should not be to influence the economy by policies of market intervention. The goal should be to get out of the way; to minimize market hindrances and promote policies that allow the economy to function most efficiently.
No doubt, the present price fixing system of garbage in garbage out economics has reached a critical mass of absurdity…
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation,” reads the recent FOMC statement.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Pure garbage indeed.
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