Western economies are waiting to be saved. Every day we learn of another rumor of a large European Financial Stabilization Fund, issuance of a Eurobond, rescue of a country (Greece), or state-sponsored recapitalization of a failing bank. The US is not much different. Markets rise and fall on rumors of QE3 or a promise from the Obama Administration of more economic stimulus programs. In fact, today markets are rising on the hopes of another European bailout plan. Financial writers and investors fervently believe that if we can only find the right fiscal and monetary formula, economic growth and financial markets will soar. Unfortunately, little in recent history supports these beliefs.
The Potent Director Fallacy
Robert Prechter in Conquer the Crash coined the term the “potent directors” fallacy. The fallacy in a nutshell:
It’s nearly impossible to find a treatise on macroeconomics that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market. The very idea that it can do these things is false. It is what I call the ‘Potent Directors’ Fallacy.”
In reality — the Fed has no such power. See The Fed is Not in Control: Potent Directors Fallacy
Prechter catalogs the stop and start policies of the Fed which led to the internet stock boom and crash. The centerpiece of poor policy making was the post internet boom decision to slash the federal funds rate thirteen times from 2001-2003, which led to the housing boom and the subsequent seventeen increases from 2004-2006, which led to the housing bust.
Even the start of QE1 could not stop the 2008-2009 plunge in the stock market. The market did not bottom for several months until March 2009. QE2 petered out in June of this year, the economy slowed, and once again the market declined.
Perception Management
Charles Hugh Smith points out that we have stopped serious policy making. Instead policy makers have focused on managing the perceptions of stock market investors and consumers, and now deal in marketing. American and European central banks and politicians wish to project the illusion that they are still in control. In his critique of the endless reassurances from Angela Merkel and Nicholas Sarkozy that European banks can be recapitalized and the Euro saved, Smith exposes the vague programs of both of these leaders and our Federal Reserve Bank:
Merkel and Sarkozy’s dog and pony show is perception management ripped right from the Federal Reserve’s playbook. The ontological foundation of the Fed’s playbook is this: the problem is all perception. If the great unwashed populace of debt-serfs perceives that all is well and secure, and the Mommy State has tucked them safely into bed, then they will once again start borrowing and spending without a care for either reality or the future. See The Uncredible Dog and Pony Show: Merkel and Sarkozy
Fundamentally, the perception management approach is incorrect. Rather, we must look at the facts of our situation, the bottom line as it were, the areas of real inequities, incompetence and fraudulent policy. At some point, we must lift the fog of spin surrounding what is really happening:
The problems of the global economy are not based in perception, but in the reality of prices, balance sheets and income statements, vast concentrations of wealth and power, precarious systemic imbalances, ruthless exploitation, and command economies mismanaged by Central State/Bank policy and manipulation. See The Uncredible Dog and Pony Show: Merkel and Sarkozy
Cargo Cults, Deus Ex Machina and Other Delusions
On October 10, we had yet another monster rally based on vague bank rescue plans. Previously markets have rallied on yet another in the endless series of Greek bailouts or speeches from Ben Bernanke hinting at QE3. Each time investors are sucked into markets only to have their hopes dashed by reality.
Sometimes, great literature uses a plot device known as deus ex machina. An inextricable problem is solved through a contrived, unexpected or implausible intervention. In Lord of the Flies, a naval officer suddenly appears to rescue the wayward boys stranded on an island. Similarly, “cargo cults” appeared during World War II, wherein primitive societies observed Japanese and American soldiers unloading manufactured goods from airplanes. After the war, the natives would establish elaborate religious rituals, such as building landing strips or copies of radios emulating the Japanese and Americans, hoping that “cargo” would soon land.
Financial media watch every move of the Federal Reserve, and European central bankers and politicians hope to divine when the recovery will appear. Each time the “solutions” deliver less than promised and the economy and markets sink. Why does anyone continue to believe the central bankers and politicians? Why is there so little independent thinking and critical analysis? How far have we progressed from belonging to our own version of a cargo cult?
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Related posts:
- Exploding Myths, Eroding Confidence
- Collateral Damage Revisited, or “Merda Incorporated?”
- How Many Branches of Government?
- Perception is Reality
- The State of Things
Tags: cargo cults, deus ex machina, EFSF, Merkel, potent director fallacy, Sarkozy
