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Powell Invokes ‘Whatever It Takes’ In Jackson Hole For No Reason, Speech Skews Dovish

A dovish touch.

A dovish touch.
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3 comments on “Powell Invokes ‘Whatever It Takes’ In Jackson Hole For No Reason, Speech Skews Dovish

  1. Thomas Higgins

    Mr. Heisenberg:

    You’ve noted elsewhere that it’s too bad that Powell is not an economist. I respectfully disagree.

    As a rule, economists have smoked the hopium that they offer to masses: the idea that theirs is a real science, one that can be used to conform the economy to their wishes. While so doing they can banish market downturns and unemployment and guarantee unending prosperity for all.

    Since the beginning of the GFC, they have tried a seemingly infinite number of remedies: the Twist, numerous round of QE, buying “assets” at par that could not otherwise be unloaded except at a steep discount…. Supposedly, they have saved us from disaster.

    A healthy economy can withstand long-term rates of around 5 percent. Yet the suggestion that such rates might rise to a mere three percent is enough to give the markets a heart attack. No, prolonged periods of pursuing a near-zero interest rate have merely created the illusion that all is well.

    So what is to be done? Ten years of NIRP have created ever larger misallocations of capital. In other words, continued NIRP cannot save us from eventual meltdown. It will, however, make things worse the longer that day of reckoning is forestalled.

    We should exchange the hopium for our one true hope: continue raising rates. Will it cause market collapse? Might it lead to higher unemployment and corporate bankruptcies? Probably, though only for the short- to mid-term while misallocations are liquidated.

    Hopefully, because Powell isn’t an economist, he can clearly see the wisdom of this course of action. Hopefully, too, he has the moral courage to carry out that policy.

    Ideally, he has the ability to spin things so that the markets don’t freak out while he is administering the medicine. I, however, am just relieved that someone with sense is now in charge.

    Keep up the good work.

    • Ask yourself this: if you just let what you believe to be a group of mad scientists (in this case economists), create a race of dangerous mutant guinea pigs (in this case bubbly markets), and those guinea pigs were then released into the wild, who would you rather be in charge of trying to get a handle on that situation? The people who created the guinea pigs and therefore know the most about them, or a lawyer with less in the way of formalized training when it comes to how to create mutant guinea pigs?

  2. Thomas Higgins

    Broadly speaking science can be divided into two types: pure, which uses the scientific method (observation, formulation of theory, experimentation to test those theories) to determine the principles under which the world operates; and applied, in which engineers employ knowledge of those principles to solve some problem. So, for example, pure chemists such as Boyle and Charles derived various laws concerning gases. Later an applied scientist, Carrier, used those laws to develop air conditioning.

    On the other hand, meteorology is highly developed as a pure science, but it is somewhat lacking with regard to application. Yes, we can make some localized changes to the weather (like cloud seeding to produce rain), but we cannot stop a hurricane or a tornado.

    This isn’t because meteorologists are stupid or lazy. Rather, weather systems are so complex, with a seemingly infinite number of inputs, that it is difficult to understand what they are going to do.

    For decades, meteorology was little more than seventh-grade science. They made weather observations and built up a database. Then, after further observations, they discover that today the barometric pressure, wind direction and speed, temperature and humidity are so and so. After consulting their database, they find that there is a 90 percent chance that it will rain the day after tomorrow. Weather is so complex that this was the best that meteorologists could come up with. Now there are computerized models, but I doubt that their predictive ability is significantly better than simply using the database. And if they don’t truly understand the weather, they certainly can’t achieve a particular outcome.

    With that in mind, let’s consider your argument (allow me to paraphrase):

    “Assuming that a mad scientist produced a race of dangerous mutant guinea pigs, those scientists would be best qualified to deal with them. By the same token, if you believe that the economists are responsible for frothy, bubbling markets, shouldn’t we choose the economists to fix them?”

    First, I don’t believe that the economists created the problem. The Wall Street houses are chiefly responsible, though in all fairness there is plenty of blame to go around. The economists merely created an environment in which others could work their mischief.

    Second, granting for the sake of argument that economics is indeed a science, what type of science is it? Is it more like chemistry or meteorology?

    Do economists test their theories through the use of controlled experiments? No.

    In order to achieve a particular outcome, they have to understand how the economy works. Do they?

    I remember former-Fed Chairman Bernanke stating that no one could have predicted the Global Financial Crisis. (This despite the fact that from 2005 onward I read many articles warning of imminent danger.) If we take Bernanke’s statement at face value, what does this tell us about the Fed’s economic insight?

    Also consider (as I noted in my previous post) that the Fed has tried all sorts of measures: the Twist, numerous rounds of QE, asset purchases…. If the Fed really understands the economy and if they indeed know how to make it dance to their tune, why didn’t they apply the correct remedy the first rattle out of the box? Or at least at some point over the course of last ten years?

    In point of fact, we are in some ways worse off than we were when the GFC started. The bubbles are bigger and the near-zero interest rate policy has done possibly irreparable harm to the pension funds.

    Ideally, we should choose someone like Volcker. He realized the limitations of economic theory and took the radical step of raising rates to 14 percent, if I remember correctly. This got rid of a lot of misallocations and paved the way for the prolonged period of prosperity that we have experienced since.

    If we can’t have Volcker, let us at least get someone (economist or no) who has the courage to do what needs to be done.

    Mr. Heisenberg, I have the utmost respect for you and your writing, and I agree with the great majority of what you say. Keep up the good work.

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