Almost one year ago (November of 2010), I posted the following regarding the problems of Europe :
Discussing the Eurozone problems, Tyler Cowen said the following:
In a nutshell, we’re watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. It’s not just about PIGS and the future of the eurozone, it’s settling a very general question about the relative power of politics and finance.
His statement is just as appropriate for the US or any other part of the world. The laws of economics are immutable. The laws of politicians are hot air.
Mr. Cowen’s quote accurately captured the battle between fantasy and reality, or as he expressed it, “politics and finance.” A year later, this process is still playing out. At this stage it appears as though finance is handily winning the battle. Reality is trumping fantasy. It always does.
Mr. Cowen’s quote illustrates both the ease and difficulty of forecasting. Using facts and economic data it was relatively easy for an objective economist to reach a similar conclusion. The laws of economics and mathematics were obvious in this situation. Neither could be annulled, but they could be avoided for a time.
As I rehash the European problem, I am reminded of a prior personal prediction. As a young man I predicted the demise of a particular academic institution. A colleague at that same institution questioned my implied timing, suggesting it was too optimistic. This older, wiser man stated that
It takes longer for an institution to die than an individual.
My friend was correct. He has passed on and I suspect I will also before this institution finally succumbs.
The difficult part of forecasting is timing. While expecting Europe to fail for reasons cited by Mr. Cowen, I did not expect it to hold together this long. Mr. Cowen probably did not either.
Institutions have means to defend themselves unavailable to individuals. When survival is at stake, there is little that will not be tried or used in the process. Ethics and laws are sacrificed in the name of the “greater good” (which is euphemistic and almost always means “for the benefit of the elite”). When survival is at stake, bending and breaking the rules provides an advantage for the powerful not available to the little guy. Doing so in the case of Europe has deferred the outcome but not altered it.
The exact same battle between fantasy and reality is being fought in the United States. The odds of winning here are no better than in Europe. The battle for survival by the ruling elites cannot be won. Unfortunately they will do anything to survive, even though it only extends their rule marginally.
Oh, one more thing about the death of institutions. When death comes it comes faster and more dramatically than anyone expected.
I have been thinking about why it is that predictions of the imminent demise of institutions are so difficult as to the timeline. My answer is that it has a lot to do with feedback and friction. By feedback I mean people are often aware of what is going on to a greater or lesser degree and adjust their actions to the movements of policy makers. When Bernanke did his QE2, people tried to hoard more — including the banks themselves, out of fear of inflation. The velocity of money did not immediately accelerate as I and many others expected. Collapsing housing prices were part of that in terms of both friction and feedback.
Our time estimates are almost always, by necessity, linear projections while the actual movement is always more akin to tacking into a head wind.
Mushroom,
You have expressed a crude form of “rational expectations” theory. If economic actors anticipate government actions, they can offset or mitigate them.
On a different note, hoarding of money is not the strategy you want to pursue if you believe high inflation is coming. You want to turn the money into goods before prices increase again or into hard goods as a store of value. Thus, anticipation of inflation produces a rising velocity of money.
Hey, I am nothing if not crude.
I agree about hoarding cash, and what I have done personally is spend hoarded, non-retirement-fund cash to buy things like generators, equipment, tools, food, and metals (I’m long on lead and brass).
But I think a lot of people facing retirement started looking at their pile and envisioning what 10 or 20% inflation for a few years would do it, and the immediate response was to stop spending. It is not logical, and it is not good theory. Still, it was my understanding that the high saving rate of the Japanese contributed to their “lost decades” and the failure of their central bank’s stimuli to spur growth.
I don’t know. I’m no economist which is why I have this site in my sidebar and try to send my visitors over here. Keep up the good work.
It’s all a roach motel being run by the roaches. They can’t get out. They won’t let anyone else get out.