Category Archives: experts

Let’er Rip, Potato Chip

Larry Kudlow, newly minted economic advisor, was on CNBC last night, advising that the Fed should “Let the economy rip.”

Larry, if you want to see what happens when a country monetizes its deficits, look south.

Nobody Understands Debt

I found Paul Krugman’s article “Nobody Understands Debt” (with the implied “except me and my Keynesian friends”) utterly annoying because it and its companion articles repeat the lack of understanding of the banking system that seems to be common to Keynesians. There’s not even the excuse that it was different in Keynes’ day, by the way.

So anyway I was going to write a caustic piece, only to find that Steve Keen had beaten me to the punch. Go Steve, I say.

Paul Krugman has published a trio of blog posts on the issue of debt in the last week: “Debt Is Money We Owe To Ourselves” (February 6th at 7.30am), “Debt: A Thought Experiment” (same day at 5.30pm), and finally “Nobody Understands Debt” (February 9th in an Op Ed).

There is one truly remarkable thing about all three articles: not one of them contains the word “Bank”.

Now you may think it’s ridiculous that an economist could discuss the macroeconomics of debt, not once but three times, and never even consider the role of banks. But Krugman would tell you why you don’t need to consider banks when talking about debt, and call you a “Banking Mystic” if you persisted.

Well Krugman would be wrong, and you would be right.

Having said all the above, it is terrifying that the people charged with regulating the financial system don’t have the slightest clue about the accounting fundamentals of its operation.


Feynman on “experts:”

There are myths and pseudo-science all over the place. I might be quite wrong, maybe they do know all this … but I don’t think I’m wrong, you see I have the advantage of having found out how difficult it is to really know something. How careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can’t believe that they know it. They haven’t done the work necessary, they haven’t done the checks necessary, they haven’t taken the care necessary. I have a great suspicion that they don’t know and that they’re intimidating people.”

To underline this, when asked what was most important to success as an economist, students ranked these skills in this order:

  1. Being smart in the sense of being good at problem solving.
  2. Excellence in mathematics.
  3. Being very knowledgeable about one particular field.
  4. Ability to make connections with prominent professors.
  5. Being interested in, and being good at, empirical research.
  6. Having a broad knowledge of the economics literature.
  7. Having a thorough knowledge of the economy.

Yes, in that order.

All Your Piazzas Are Belong To Us

So Italy’s new Prime Minister-designate is a Goldman “adviser” who will nominate a cabinet of “non-politicians.” Ah, the technocrat deus ex machina. All I can say is, good luck with that. I can practically hear the licking of chops in 200 West Street from here. “This is the band of criminals who brought us this financial disaster. It is like asking arsonists to put out the fire,” commented Alessandro Sallusti, editor of Il Giornale, a Milan daily owned by the Berlusconi family.


Misery Loves Company

We’re in the midst of moving across the country, from California to Florida. Indeed, as I write, the truck with our goods and chattels is somewhere in Arizona, headed east. We are moving from one rental to another. Of course, whenever we tell any our friends about our decision, we get The Question: “Have you bought a place?” The answer is no. Not now, anyway. Not because it is cheaper – rent vs buy is roughly equivalent, cash on cash, in the area where we are now living. The problem is that property values are continuing to fall. This is a nationwide situation, although of course Florida and California are both falling faster than the national averages. The problem is that misguided government efforts to hold prices up are preventing market clearing. Huge inventories of housing units are sitting vacant because they cannot be sold to new end users at prices they are willing and able to pay. In Florida, in particular, 18% of housing units are vacant. And of course many other units are in various stages of foreclosure or are just for sale for ordinary reasons.

So I can’t see actually buying anything until I see the market beginning to clear – that is, inventories beginning to move towards normal levels. This will occur, but before it does, the necessary fall in prices will put even more owners underwater, aggravating the problem (which I why the government, knowing this, wants to keep prices up). Learned people are talking about another 10% down. Personally, I don’t think so, my best guess is back to 1997 pricing or thereabouts, which is about 40% down from here. Mr Bernanke and the administration are laboring mightily (pun 100% intentional) to keep wages and asset prices up, at least for the benefit of their principal client groups, the wealthy and organized labor. This effort will fail, just as it did in the 1930s Depression, but it won’t be over until The Question becomes: “You bought a place? I mean, why on earth would you, of all people, do that?” Such is the life of a contrarian.

Destructive Pseudo-Science

The methodological work of luminaries such as Francis Bacon, Rene Descartes and Sir Isaac Newton, inter alia, created a rapid acceleration in our knowledge about the world and the universe in which we live and laid the foundations of the modern scientific method. More recently, thinkers like Karl Popper and Thomas Kuhn have added to this foundation. This methodology has been very successful in delivering the technological wonders we take for granted every day, and accordingly scientists have considerable credibility. By and large, scientists adhere to the scientific method and do not abuse this credibility. However, there are important examples of areas of knowledge where the scientific method is not used or abused, and the mantle of “science” is used to promote either political or religious causes, or just old-fashioned economic self-interest. Here are four:

  1. Economics: Neo-classical economics and Keynesianism. This pseudo-science is causing untold misery and economic ruin around the world, with much more to come. The U.S. Federal Reserve is by far the largest source of funding for economic research, but will not fund research that dissents or might dissent from the Fed’s views. Accordingly, if you want a plush career in economics, you must become a Fed sycophant. And people do. This closed universe ignores reality, but generates dangerous and economically lethal policy decisions, which have already brought the U.S. economy to its knees and are now in the process of dropping the axe.
  2. Nutrition: The low-fat movement. This pseudo-science has caused an epidemic of obesity and its associated health problems. “Experts” on human nutrition staged a massive campaign to eliminate or reduce fat, especially animal fat, from food. As a result, people’s food intake shifted away from fats and protein and into carbohydrates, especially the sugar that was added to food to replace the flavors lost when fat was removed. This shift has proved to be a huge mistake as obesity and health problems such as diabetes have surged. The original recommendation was supported with very limited data and essentially no testing. Today, it is becoming well established that the horrible truth is that pioneers like Dr Atkins were right, and it is excessive consumption of carbohydrates which is the true killer, not fat (or the butler with the candlestick for that matter).
  3. Climatology: Global warming. This pseudo-science has caused little actual direct damage so far, but has commanded so much mind-share that it has shifted attention from real environmental problems, such as the depletion of the ocean fisheries. Advocates of global warming cite climate models that are clearly incomplete and lack predictive value, and then spend much of their time attempting to discredit their critics. They may even be right, but we simply don’t have enough information to know with any certainty and neither do they. Policy actions which would devastate the global economy and reduce everyone’s standard of living are the objective of environmentalists who view the human race (themselves excepted, of course) as a blight on the face of Gaia and “global warming” is their lever. They are dangerous. Just like Lloyd Blankfein, who also claims to be “doing God’s work.”
  4. Psychology: Psychotherapy. This Newsweek article, “Ignoring The Evidence” covers the issue:
  5. For one thing, says Baker, clinical psychologists are “deeply ambivalent about the role of science” and “lack solid science training”—a result of science-lite curricula, especially in Psy.D. programs. Also, one third of patients get better no matter what therapy (if any) they have, “and psychologists remember these successes, attributing them, wrongly, to the treatment. It’s very threatening to think our profession is a charade.”

    When confronted with evidence that treatments they offer are not supported by science, clinicians argue that they know better than some study what works. In surveys, they admit they value personal experience over research evidence, and a 2006 Presidential Task Force of the American Psychological Association—the 150,000-strong group dominated by clinicians—gave equal weight to the personal experiences of the clinician and to scientific evidence, a stance they defend as a way to avoid “cookbook medicine.” A 2008 survey of 591 psychologists in private practice found that they rely more on their own and colleagues’ experience than on science when deciding how to treat a patient. (This is less true of psychiatrists, since these M.D.s receive extensive scientific training.) If they keep on this path as insurers demand evidence-based medicine, warns Mischel, psychology will “discredit and marginalize itself.”

    If public shaming doesn’t help, Baker’s team suggests a new accreditation system to “stigmatize ascientific training programs and practitioners.”

    For another example, I think that “retrieved memory” of child abuse, where has finally been discredited, but not until many lives had been permanently damaged, those of both alleged abusers and their supposed victims.

This list could go on. But the message is that ignoring evidence that falsifies your hypotheses is a direct violation of the scientific method that dates back hundred of years. People do this because they derive direct economic, social or political benefits from a certain paradigm, and are understandably very reluctant to accept that it is false. But where systematically ignoring the evidence can be shown to cause harm, there should be consequences for individuals as well as the reputation of the “profession.”

A Parable

Warren Buffett says Charlie Munger, his partner, is the brains of the outfit. We seldom hear from Charlie, so when we do, we should pay attention. Unlike the Oracle of Omaha, who speaks bluntly these days, Charlie speaks in parables. According to Wikipedia, the word “parable” comes from the name given by Greek rhetoricians to any fictive illustration in the form of a brief narrative. Later it came to mean a fictitious narrative, generally referring to something that might naturally occur, by which spiritual and moral matters might be conveyed. A parable is a short tale that illustrates universal truth, one of the simplest of narratives. It sketches a setting, describes an action, and shows the results.

Basically, It’s Over. A parable about how one nation came to financial ruin.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country’s credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.

I hope Charlie is right about the new management and governmental system.


“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo Clinic or Sloan Kettering and all the medical staff were watching General Hospital…”

-Senior portfolio manager, UBS

Roll Out The Barrel

The oil report this morning shows that we are up to our metaphorical necks in oil and products.  At some point, the speculative buying of oil and other commodities is going to meet the reality of end user demand, or rather the lack of it. Oil is going back to $20/bbl. (or less). How’s that for a contrarian call?

The BDI, mentioned yesterday, shows that the Chinese stockpiling of commodities has dried up, now the pig farmers have to work off their inventories of copper and nickel.

As the resident moron, I’ve figured out that I’m fading nearly everyone. One thing that is shared by the economic and market bulls and the bears is a certainty that the Fed is going to cause severe inflation, even hyperinflation. Jim (buy commodities) Rogers, Bill (buy gold) Fleckenstein and Marc (big trouble coming) Faber, to name three heroes of the bears, all agree on coming inflation. Bulls and bears all agree that one must own stocks, or at least not short them, to protect yourself against rising inflation. Much as I respect this august crowd, I have to differ. I just don’t see it. The banking system is broken and on life support. Unemployment is over 10%. How are you going to get enough demand to support rising prices?

I must admit that earlier this year I, too, drank the same Kool-Aid. I was impressed by the enormous scale of Bernanke’s interference in the economy and the government’s spending spree. But it is all disappearing into a black hole. Yes, Europe and China don’t look so bad. But neither of them have been an engine for global growth – China is not yet large enough (although it could get to be) and the European economic model resists change – growth as well as decline. When Emperor Bernanke is shown to be guilty of indecent exposure, will the returning confidence that has buoyed these economies be sustained? I think not.

Anyway, it seems to me that nearly everyone is worried about inflation – except the bond market.  And Ben Bernanke.


This is only marginally financial, but it is so illustrative of the insanity that grips politicians that I have to post it to my blog. From the Times:

For the first time, America and the other seven richest economies agreed to the goal of keeping the world’s average temperature from rising more than 2C (3.6F).

Good old Knut was smart enough to understand that he could not halt the rising tide. These guys are not. Not only do they believe that they can control the world’s economy through monetary policy and “stimulus,” they even believe that they can control the world’s temperature based on “science” that is even more sleazy than neo-classical economics. I use the word “science’ with misgivings.

Environmentalists and neoclassical economists have a great deal in common. Both have strongly held beliefs about how the world works. Neither can claim any discernible success in associating cause with effect, although both spend a great deal of time mangling historical data, in order to be able to interpret it in a manner consistent with their respective paradigms.

One claim I will assert is that both systems – the world environment and the world economy – are sufficiently complex and chaotic to be beyond anyone’s present capabilities of reductionist analysis. In both cases, the advocates of the prevailing paradigms work actively to suppress discussion and dissent – they know that their analysis will not withstand it. They claim universal support amongst experts in their respective fields, even though there are active and large communities of expert dissent in both cases, whose voices are suppressed by the media and politicians who do not wish them to be heard.

I have no formal training in environmental science or economics. I am just a lowly engineer with a lifetime of dealing with problems in the real world, where success and failure are objectively and promptly measured. As a result, I do know bogus when I see it. And both these schools of thought are totally bogus, because the actions of their advocates in suppressing dissent show that they know that they have no ability to withstand objective challenge.

Oh, and you politicians? One thing that we know is entirely anthropogenic is war. So how about some of that world peace while you are in an omnipotent mood?