Friday, November 17, 2017


Jeffrey Snider, the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor, posts (17 November) on Real Clear Markets: HERE
“Trying to Make It a Legitimate 'Science', Economists Achieved the Opposite”
[Economics now publicly chastises as it tries as it tries to degrade the most significant markets on the planet] is perhaps a case study in the unraveling of a theory.  The contradiction is just too good to ignore.
And it is a very simple case of not being able to see the forest for the trees.  Central banks around the world claim they are normalizing monetary policy for the first time in a decade because their respective economies have finally healed more than enough to warrant some normalness.  Several of them, including the Fed and now the Bank of England, are raising rates to that end.
Yet, in doing so they are increasingly perplexed, visibly miffed even, at what little respect for their power is being displayed practically everywhere.  Inflation is coming, they say. Growth is picking up, they say.  With those can only be higher rates….
That’s true.  If inflation was to actually accelerate along with economic growth and opportunity, bond rates especially at whatever long end would be rising.  Each yield curve would steepen first in doing so, and then flatten as the process wound down into full recovery and an actual rather than imagined economic boom.
Yield curves are flattening, alright, only at the start of the process rather than at its end.  It’s this that has central banks, and the media, nearly apoplectic.  Central banker after central banker says things are working and getting better, and that because of this they will raise the short end of each curve. The bond market reply isn’t that central bankers are wrong about what they will do, it’s more so that markets don’t care one bit because they are wrong about why they will do it. …
… The problem is science. What I mean by that is Economics can never really be one, at least not in the same way as physics or whatever other hard science. The scientific process is about observation, replication of results, and predictability.  Any hypothesis must be observed, verified by results that anyone else can replicate, and lead to predictable outcomes. 
For Economics, what truly counts as an observation? What actually happens inside any economy down to the smallest one is unobservable. We know that transactions and trading takes place, but there is no possible way to track and measure every single thing that occurs.  Even if it was possible to track all of it, there is no clear method for aggregation and then useful analysis. Thus, any economic observer is always at the start forced into short cuts to try to make sense of Adam Smith’s invisible hand. (GK my emphasis)
..In short, bonds are calling the inflation/growth bluff.  And why wouldn’t they?  We’ve heard all this before, several times, and often in just as emphatic terms as now....
...The chief difference between that conundrum and this one, though, isn’t just numbers.  ...
...Rather than listening to the market, central bankers and economists are telling everyone else not to. This is extremely odd given that rational expectations demands respect for market prices.  We know from history, however, especially the crisis history over the last ten years, that central banks don’t actually operate based on market reality but instead theoretical market “reality.”…
Rather than turn it into a truly scientific process, however, the focus on mathematics has inverted the whole of it. The mathematics have become all that matters to an Economist, so that without it he can make no sense of anything that doesn’t fit.  The main part of any scientific process is falsification, but in Economics there can be none. The models have become more real than reality. …
More evidence that some economists are becoming wary of the accepted (imposed?) models that are   celebrated within the discipline and are repeated in the popular media.
The irony is that the celebrated quality standards that count for promotion and prominence in economics are now those of higher mathematics supposedly replicating reality. Hence, the mindless celebration of the "invisible hand", the wholly misunderstood metaphor used once by Adam Smith in Wealth of Nations, which sat unrecognised in his now famous textbook for 60 years by those who read and wrote about it from its last edition (1789) until the 1850s. Even then it was another generation before a brilliant mathematical economist, Paul Samuelson) misinterpreted Smith's metaphor, supposedly as the most significant theoretical contribution to 20th century economics in his 1948, textbook., and misled generations of economists (and their students) to repeat his error.


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