Turn on the tube and economic ignorance seems to be everywhere. There is constant shilling for more government. Business is demonized. Man is said to be trashing the environment. “Workers and women are oppressed” is the constant mantra.And members of the clueless media nod their heads in unison.Only John Stossel has provided the fresh air […]
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]
In the minds of many people around the world, including in the United States, the term “capitalism” carries the idea of unfairness, exploitation, undeserved privilege and power, and immoral profit making. What is often difficult to get people to understand is that this misplaced conception of “capitalism” has nothing to do with real free markets […]
Some people are saying it is just what the doctor ordered. Others are saying that the cure is worse than the disease.The Affordable Care Act? Reengagement in Iraq? Tea Party bullying in the GOP?Not this time. Just as protracted in the corridors of Congress and the White House is the debate over the proposed reform […]
In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]
People jacked up about income inequality can find a new hobby. The 1% are victims of a doomsday machine, and the countdown is ticking. Machine, thy name is “family.”This came to mind as I was reading a preview of Columbia Professor Andrew Ang’s forthcoming, must-read book on Asset Management. Ang is that oxymoron, an exciting […]
It might sound like the latest new product from Apple, but IPAB is actually the newest major legal challenge to Obamacare.Recently, a three-judge panel in the 9th Circuit Court of Appeals in San Francisco heard arguments about the Independent Payment Advisory Board, or IPAB, a 15-member panel created by the Affordable Care Act and empowered […]
Americans have come to believe that the IRS and the income tax are inevitable parts of our lives. After all, most everyone alive today has lived his entire life under federal income taxation.It wasn’t always that way. For some 125 years, the American people lived without having any tax imposed upon their income.The obvious question […]
Here’s a fun fact: Although we all hate the U.S. dollar, as it continues to hemorrhage wealth, its foothold as the world’s reserve currency isn’t going to disappear overnight.A Russian gas deal with China won’t change that — as we’ll highlight below.But before we get to the nitty-gritty, let’s dive into a story that’s right […]
Franklin Delano Roosevelt famously used the term “forgotten man” in a 1932 speech to describe those at the bottom of the economic pyramid who, he felt, government should aid.But the originator of the phrase “forgotten man” had a whole different meaning in mind. He aimed to expose the seeming good intentions of government to reveal […]
The Keynesian disaster recovery plan has been to lower rates, force people to take more risk in search of yield, and entice others to borrow and spend and, magically, more jobs will be created. If people won’t buy stocks, central banks will.Back in 2011, Ben Bernanke, when asked if QE2 was driving up stock prices, […]
I want to share some insight and give you a front-row seat to America’s next big shale play.Let’s get to it…Over the past 10 years, the U.S. has turned the ship around, quite literally.We’ve gone from a country that was expecting to import massive amounts of oil and gas — to a country that’s sitting […]
Whatever your views on the role of government, one thing is clear: There will be no way to pay for it if the economy doesn’t grow. And I’m not talking by a measly percentage point or two. If we can’t find our way back to 5% annual economic growth or above soon, America’s accumulated federal […]
According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper.Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why […]
Politicians love raising the minimum wage because they don’t have to ask voters to pay more in taxes. They just dump the costs onto shop owners. But they don’t act like politicians and go into debt to pretend like they have all the money in the world. They face real world situations. And sometimes that means replacing workers with more affordable options...
Regulation is supposed to keep you safe and make the economy function smoothly. At least that’s what they tell you in the news. But there’s another cost to regulation. One that you won’t hear about unless you have to deal with directly. And for the people in the economy who do, they’re the ones who have to pay the final cost.
The experts will tell you the recession is over, but they’re only torturing the data to hide the truth. The economy never recovered from the downturn it experienced. But the downturn happened in 2000, not 2008. The country’s been in the middle of a 14 year recession and hardly anyone knows the truth.
Every time Bitcoin crashes, it winds up at a price greater than it’s previous high. Yet the experts still call it a currency fad that will fade away. But a little over a year since it really took up, the digital currency is still going strong, and is once again seeing its price rise. But is there another reason why people are buying Bitcoins.
All paper currency has a shelf life. It could be 5 years or 500 years, but at some point, the value of any paper currency eventually reaches zero. That's why, for centuries, people have turned to one shiny metal to safeguard their personal store of wealth. And, as Jim Rickards explains, you still have that option. Read on...
According to some estimates, one man - whose name you're probably not familiar with - has saved over a billion lives. Who is he? And how has he influenced the current crop of innovators? Josh Grasmick explains...
It’s a destructive cycle that comes around everytime your politicians ask you to take to the polls. The government’s meddling creates unexpected problems that eventually overshadow the planners’ original intentions. But that only leads the way for even more interventions.
Politicians love inflation. It’s a way to pay for the government’s debts without upsetting the public by raising taxes, or their special interests by cutting government. So they’ll flood the economy with easy money and eat away at your savings. But that’s only part of the story...
You can count the number of people who went to jail over the 2008 financial crisis on one hand. Which is strange considering the U.S. loves to put people away in jail. But as one author discovered in his most recent book, having the right connections and a big enough bank account, can protect you from even the worst crimes.
Obama recently claimed this was the “Decade of the Brain”. But it not the first time the government made that promise. The last time they did it, they wasted millions of your tax dollars. Now they’re back for round two. But this time, their failure could mean more than squandered money. It could mean making Alzheimer’s even worse for those who suffer from it.
“So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years… And the labor market is behaving in some perplexing ways and showing patterns that are novel.”–Federal Reserve Chairperson Janet Yellen in a speech to the Economic Club of New […]
When Michael Lewis’ new book Flash Boys came out, the author caused a stir while making the media rounds to promote it. “The stock market is rigged,” he told 60 Minutes flatly. His comments set off a firestorm of debate as to whether sharp techies and their fast computers are screwing small investors.As titillating as […]
Last November, when the Environment Protection Agency (EPA) proposed moderating years of escalating mandates by reducing the amount of ethanol that must be mixed into gasoline, a top ethanol lobbyist seemed perplexed. “We’re all just sort of scratching our heads here today and wondering why this administration is telling us to burn less of a […]
The voting machine that is the market deemed an ounce of gold to be worth $1,600 a few days ago and then, whoops, two days later, that same market, the collection of rational minds that trade in the metal, valued that same ounce to be worth less than $1,400.
Keep in mind: These prices are in dollars that are not backed by anything other than Uncle Sam’s less-than-creditworthy promise.
Economists of the rational-expectations school and believers in the efficient-market hypothesis must be scratching their heads. These deep thinkers contend all information is known in the market. There are no such things as bubbles and busts.
Wikipedia explains rational expectations,
“it is assumed that outcomes that are being forecast do not differ systematically from the market equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future, and deviations from perfect foresight are only random.”
Yep, that sounds exactly like you, me, and your idiot brother-in-law. Nobody makes mistakes when predicting the future.
At the same time, Eugene Fama, father of the efficient-markets hypothesis, says, “I think most bubbles are 20-20 hindsight.” When asked by John Cassidy at the New Yorker to clarify whether he thought bubbles can exist, Fama answered “They [bubbles] have to be predictable phenomena.”
Fama is no Nobel laureate, but he did co-author a textbook with Nobel Prize winner Merton H. Miller, and he himself has won plenty of prestigious awards for his theoretical work.
These guys can theorize all they want to, and win awards doing it, but what they have to say has nothing to do with how markets act and react.
This week’s Laissez Faire Club author, Alec Macfie, was an economist lecturing at the University of Glasgow back in the 1930s. He had a better head on his shoulders than today’s fuzzy-minded theoreticians who evidently haven’t taken the time to look out of their campus office windows to see how the world really works.
Macfie explores the ups and downs of the business cycle as well as investment booms and busts in his elegantly written Theories of the Trade Cycle. He not only, among other things, provides a clear synopsis of Hayek’s Austrian Business Cycle theory, but he also makes use of psychology to solve the business cycle puzzle. Investor errors are revealed in a crash as entrepreneurial errors are revealed by recessions. In Macfie’s view, the term error should be substituted with “excesses of optimism and pessimism.”
He explains that in a bull market the possibility of potential profits is spread by suggestion and is overemphasized. Investors hear the potential but not any opposing rational criticism. “A man acting under the influence of suggestion is like commander of a submarine observing his enemy through a periscope. He sees his easy prey and is impelled toward it, but his periscope cloaks from him the surrounding dangers,” writes Macfie.
But how could investors or entrepreneurs go from bullish to bearish so quickly to create huge drops in assets prices? A. C. Pigou, a renown English economist at the time, sheds some light on this, explaining, “An industrial boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more readily than he passes to quiescence.”
So for investors there is no inbetween, they go from bullish to bearish in the blink of an eye. Just what is it that sets them off? “It is, of course, common knowledge that we tend to manufacture rational explanations for conduct which springs largely from our unconscious urges,” Macfie explains. “Every politician, every elector, exemplifies this.”
Manufactured rational explanations or rationalization is constant in individual finance, according to Elliott Wave’s Robert Prechter. Individuals use reason to succeed in economic endeavours. However, in finance, individuals rationalize the decisions they have made that amount to simply herding with other investors. Rather than make their own valuations, investors depend upon others’ valuations. Rather than having knowledge about markets they remain ignorant. Rather than using objective value, investors value subjectively.
Bubbles and crashes are consistent with nonrational risk aversion, but not with rational assessments of risk. Still, people are hyper risk sensitive and often resort to bailout first and analyze later. “Thus, it is the instinct of each herd member to flee from danger that supplies the force behind the stampede,” writes Professor Macfie, even though that force maybe be a mere suggestion.
And while an individual will achieve prosperity acting in the economic sphere, that same person will chase booms and busts in finance. Why? According to Prechter, speaking at The 2013 Socionomics Summit in Atlanta, these decisions are made with two completely different parts of the brain. We use the rational part of our brain, the neocortex, to make economic decisions and maximize utility. However, investment decisions are made in the limbic system, that is driven by emotion, making us follow the herd.
Does any of this make sense from an evolutionary standpoint? Actually, yes, according to Prechter, “Prosperity keeps humans alive in the short run. Setbacks keep the species alive in the long run.”
The pummeling of gold was certainly a setback for those who are betting against the central bank controlled new world order. But one should realize that central bankers are no more than academic theoreticians lucky enough to get a government job. Their views of how the how the economy and markets work have no basis in reality.
Yes, the gold herd was spooked a few days ago. But the yellow metal has been around a lot longer than Ph.D. economists and will prove more durable in the end.