Insanity: doing the same thing over and over again and expecting different results -- Albert Einstein
Once again the markets breathlessly await the verdict from the grand viziers of high finance, the priests of our time. Will they, in their (hopefully) infinite wisdom reduce the cost of money to member banks, which, it is hoped, will improve the lives of the citizenry. I just can't help but compare the market focus on the Fed to tales of pagan worshippers fervently hoping that the sacrifice of this virgin, in contrast to the past few, will bring rain, or ward off the enemy. I don't have any special insight into Fed deliberations, and while we wait for the metaphoric virgin to be dragged to the altar, let me amuse you with some insane musings, or is that musings on insanity. I'll leave it for you to decide.
In his Zen and the Art of Motorcycle Maintenance, Robert Pirsig takes a stab at defining sanity based on one's acceptance of the current mythos;
The mythos-over-logos argument points to the fact that each child is born as ignorant as any caveman. What keeps the world from reverting to the Neanderthal with each generation is the continuing, ongoing mythos, transformed into logos but still mythos, the huge body of common knowledge that unites our minds as cells are united in the body of man. To feel that one is not so united, that one can accept or discard this mythos as one pleases, is not to understand what the mythos is.
There is only one kind of person, Phædrus said, who accepts or rejects the mythos in which he lives. And the definition of that person, when he has rejected the mythos, Phædrus said, is "insane." To go outside the mythos is to become insane. —
Based on that definition these musings would suggest a bit of financial insanity in that I aim to question the faith that the Fed can fix what ails the global economy. While it might be comforting to think, as pagan societies took comfort in their rituals, that the economic problems of the world can be fixed by changing the value of the medium of exchange, the evidence thus far is not supportive. I recall easy Al Greenspan speaking once about the inability of economic policy makers to experiment, as physicists can. If this orgy of rate cuts is not an experimental test of Friedman's thesis that inadequate money supply was the root cause of the great depression, well, you can call me crazy.
On the topic of madness, see how the insane mind weaves and darts, did you read the story about S Korean President Kim Dae Jung's government's $100M payment to Kim Jong-il, in order to set up the historic summit between the two warring states. The then S Korea President narrowly beat out ex US President Bill Clinton, despite intense lobbying efforts, for the Nobel Peace Prize in 2000. One good fraud deserves another, eh. Let's finish this digression with the World Bank's admonition to Indonesia to reduce pollution. I've had the good fortune to visit Java, Bali, Bintan and Batam, a few of Indonesia's islands, more than once. Oddly, the build-up which led to the pollution was facilitated by, among others, World Bank loans. What I wonder is, what did these clever fellows at the World Bank think was going to happen when they told Suharto's government to develop the nation?
Back to the pressing issue of the day, let's consider recent rate cuts in light of Einstein's views on insanity, i.e. that it is doing the same things and expecting different results. Today's charts detail a few aspects of the economic changes which flowed from this Friedmanite experiment, an experiment, mind you, which has lost the support of it's founder. In an FT article of a few weeks ago, Uncle Miltie, having filled the minds of many leading economists over the past 30 years with his monetarist views, recants, "The use of quantity of money as a target has not been a success. I’m not sure I would push it as hard as I once did." Psst, Milton, you can't get a little bit pregnant, nor can a nation erase the buildup of debt incurred, in part, due to faith that depressions were, according to you, a thing of the past.
Since the Fed last raised rates in May of 2000, shifting into easing mode late that year, the stock market has lost some 30%, Gold has risen by 30%, total credit market debt has risen from an amazing 185% of GDP to a jaw dropping 201% and the Trade deficit has increased from $360B annualized to over $500B. To the extent Asian Central Banks remain willing to accept US wampum, I can't understand why anyone expects these trends to reverse. Reducing the cost of borrowing is the means by which borrowers are induced to borrow more. The problem facing the world, in this mad view, is that it is near impossible to rationalize the debt stock to the means of production. How more debt will solve this problem is beyond me.
There is, however, a end game in sight, or at least it seems that way to crazy ole me. At some point, a critical mass of people will look at the US$ and go, this is just a promissory note, which means it is only as good as the promises of the issuer. By the way, where are those WMD? Like deer transfixed by headlights, we hope the onrushing depression, a function of discontinuity between the financial world and the real world, will pass us by despite our history. I guess I'm a bit nuts to be standing off the fiat money road, or am I? Got Gold?
June 26, 2003