Do we get deflation or inflation? Today we look at the darker scenario.

Summary: One example of our inability to see the world through our ideological blinders is the obsession with inflation (coming real soon, so we’ve been told for 3 years) while deflation bangs on the door. We must learn to see better. Fortunately the people running the economy see more clearly (despite the mockery and insults directed at them by the ignorant and deluded), and have taken measures to defend against deflationary forces threatening the US economy. The outcome remains uncertain, however.




Seeing the world clearly requires awareness of the full range of reasonably possible outcomes (in the far tails of the bell curve lie dragons, to discuss on another day). Those giving hysterical and insanely confident forecasts of inflation and hyperinflation are blind — and blind their fans — to the danger of deflation.

Both are outcomes are possible, perhaps sequentially.

Today we look at the analysis of one expert, Russell Napier — global strategist of CLSA.

Excerpt from “Great reset revisited”, 7 June 2013

The world has been in disinflation since 2011: deflation is next. Japan has won the currency war and its cheaper exports are forcing others to cut prices. Meanwhile, slowing growth and weakening currencies in emerging markets augur a debt crisis; and commodity prices continue to fall amid a global slowdown and rising supply. Most worryingly, both real interest rates and the US dollar are rising.

US inflation has fallen despite QE

  • QE is not delivering: the Fed’s balance sheet has grown by 18% since September 2011, while inflation has fallen from 3.9% to 1.1%.
  • The US 30-year bond yield has remained unchanged over this period: thus US real rates have risen by 280 bps {2.8%} despite QE.
  • US nominal rates bottomed a year ago and have risen by 83bps since then, while inflation has fallen by 33bps.
  • Moreover, the Treasury inflation-protected securities (TIPS) market indicates that inflation expectations are falling, while nominal yields are rising.

EM growth is slowing and exchange rates are under pressure

  • Weakening emerging-market (EM) currencies augur a balance-of-payments crisis, which means either lower domestic growth or lower exchange rates and defaults.
  • As the EM growth outlook deteriorates, global inflation will fall further.
  • EM foreign-currency bond prices are cracking, indicating that the large capital inflows that funded current-account deficits are ending. Japan has won the currency war and is now exporting deflation

On the back of yen depreciation, Japan is cutting its US-dollar selling prices.

  • Japan’s actions have forced competitors to follow suit: now Korea and China are also exporting deflation to the USA.
  • The Bank of Japan’s need to prevent JGB {Japanese government bond} yields from rising will mean ever greater intervention and even more deflationary pressure from a weakening yen.

… In 1Q 2009, this analyst tried to persuade investors that excessively easy monetary policy would likely defeat the expected deflation … The overwhelming response was that there was no way the creation of money could offset the negatives associated with the large surplus of supply relative to demand. There was huge scepticism that the Fed’s ability to alter this one variable could play much of a role in altering all the other ‘fundamental’ variables …

Today, things could hardly be more different. In conversations with investors, the opinion is regularly expressed that Ben Bernanke can accelerate or decelerate money-supply growth as required; stop the US dollar’s rise; halt deflation; contain inflation; and underwrite asset prices. Some also argue that he could intervene to stop a liquidity squeese in EMs and buy euros if necessary to prevent the breakup of the Eurozone.

… Financial history has some very simple and clear things to say on this subject. Central bankers can only target one variable at a time, and their track record in hitting just one target is extremely poor. Ben simply doesn’t have the power to fix all the things that can go wrong.

Excerpt from “An ill wind”, 25 November 2013


Deflationary forces are gathering strength

  • Prices of exports from Japan, China and Korea continue to fall.
  • Bank credit growth is slowing rapidly in the USA and contracting in the Eurozone.
  • Nestle has cut its selling prices in Europe as deflation spreads from commodities to consumer staples.

… The Fed’s desire to hold inflation expectations above 1.5% … is evident from when it chose to fight its battles. The launches of QE2, Operation Twist and QE3 all coincided with five-year-TIPS-implied inflation declining below 2.0% and heading towards or below 1.5%. These decisions to up the ante in monetary policy as inflation expectations approached the key 1.5% level were not coincidental.

QE2 in November 2010 was followed by a rise in both inflation expectations and actual inflation, while both Operation Twist in September 2011 and QE3 in September 2012 were followed by a rise in inflation expectations but a decline in recorded inflation. Thus since September 2011, the Fed has succeeding in managing inflation expectations but not inflation itself.

Has anybody noticed? What happens when they do? Will QE4 be as successful at changing even inflation expectations when QE1, QE2, Operation Twist and QE3 have failed to prevent recorded inflation from now falling to 1.1%?

… Since the launch of QE in March 2009, Solid Ground has focused on the prospect of it leading to far too easy monetary conditions in EMs and rampant inflation. Such inflation did indeed materialise and it undermined EMs’ competitiveness and brought a major deterioration in their external accounts. However the high levels of domestic inflation in EMs, particularly wage growth, did not spill out into inflation in the globally traded goods market. This phenomenon was particularly pronounced in China, where a 70% rise in wages since the launch of QE has produced only a 4% rise in the price of Chinese imports to the USA.

… the price of Chinese imports to the US has fallen throughout 2013 despite continued strong rises in wages. The most obvious source of global inflation remains contained within China where its main impact seems to be in eroding corporate profit margins rather than pushing up the general price level.

The downward pressure on globally tradable goods is occurring as commodity prices continue to decline. The decline in commodity prices began in 2011 as EM economic growth peaked. In recent weeks prices have declined again and are almost back to their recent lows of June 2013. With more evidence of a continued growth slowdown in EMs, the decline in commodity prices and the associated disinflationary impacts seem set to continue.

For More Information

Posts about deflation:

Posts about inflation:

  1. Inflation is coming! Or so we’re told. Instead look at the evidence., 7 February 2011
  2. Inciting fear of inflation in our minds for political gain (we are easily led), 28 February 2011
  3. Update on the inflation hysteria, the invisible monster about to devour us!. 15 April 2011
  4. Conservatives were correct: we have record-breaking inflation! What’s next?, 14 June 2013 — Record low inflation
  5. Lessons from the failed forecasts of inflation since the crash, 5 October 2013

About the greatest monetary experiment, ever:

  1. Important things to know about QE2 (forewarned is forearmed), 21 October 2010
  2. Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010
  3. The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
  4. The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
  5. The greatest monetary experiment, ever, 20 June 2013
  6. Different answers to your questions about the momentous Fed decision to delay tapering, 20 Sept 2013
  7. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
  8. Two warnings about quantitative easing, the taper, and what comes next, 27 September 2013
  9. Dr Hunt explains the great monetary experiment. It will be historic, no matter what the result., 20 October 2013
  10. The great monetary experiment enters a new phase, with America as the stakes, 27 October 2013
  11. The key to understanding the future of QE3, and the future of our economy, 12 November 2013
  12. How to predict the outcome of this great monetary experiment, and how we got into this box, 15 November 2013



33 thoughts on “Do we get deflation or inflation? Today we look at the darker scenario.”

  1. Pingback: Do we get deflation or inflation? Today we look at the darker scenario. - Global Dissident

  2. Bonesetter Brown

    No doubt we are living in Irving Fisher’s debt-deflationary world.

    None of these “people running the economy” (which is a very poor, if telling phrase) sounded the alarm at any time during the great debt super cycle. Debt/GDP, marginal utility of debt, the growth of the shadow banking system, etc. were largely ignored by the Fed and policy makers.

    Sure, the Fed and the US Gov should be given credit for the limited efficacy of QE and fiscal stimulus. But that is a bit like applauding the doctor for keeping the patient on life support after the same doctor’s malpractice resulted in the patient going to the ER.

    1. Bonesetter,

      That is, unfortunately, a good summary.

      My point was consistent with your observations. The people in power show little foresight, because it is career suicide to take the punch bowl away while the powerful financial interests party.

      But now the danger of deflation is obvious to anyone paying attention. Hence they have the ability to act, and have.

      Success is not, however, certain.

  3. Great post


    But how do we get the folks in Congress to acknowledge this danger to their constituents?

    Seems like everyone I know from the right or the left only thinks about inflation.

    Is there any summary of who loses in rapid deflation?

    1. The big losers in deflation are debtors, the big winners in deflation are creditors. Deflation can crush an economy more effectively than hyperinflation, since the velocity of circulation of money drops to near-zero and everyone hoards cash rather than spending it, for cash increases in value as time passes. The “paradox of thrift” spreads like a cancer and the output gap skyrockets.

      1. Thomas makes good points.

        Hyperinflation in a debt-heavy economy can produce a feverish boom, as in Weimar Germany. Destructive but in a fun sort of way. Except for those on sustenance-level fixed incomes (e.g., non-wealthy retirees), who suffer deep poverty.

        Deflation in a debt-heavy society produces a fast depression, with widespread and intense suffering.

        So hyperinflation and deflation each produces winners and losers, and the depth and nature of the pain depends on specific social and financial factors.

        “But how do we get the folks in Congress to acknowledge this danger to their constituents?”

        Prayer. This is why control of these complex matters was shifted to the Fed. Congress and the White House are hopelessly incompetent. They might as well try to fly a space shuttle.

  4. WIthout gold standard, a deflationary spiral is simply impossible. Deflation spiral cannot happen when Central bank can create an infinite amount of money instantaneously.

    1. Morse,

      “Deflation spiral cannot happen when Central bank can create an infinite amount of money instantaneously.”

      What do you mean by a “deflationary spiral”?

      Deflation is possible. Japan’s CPI was 104.9 in December 1998, declining to 99.2 in March 2013. Massive fiscal and monetary stimulus cushioned the impact, but those were 15 tough years.

      Bernanke gave the conventional answer in his famous 21 November 2002 speech, when Japan was 4 years into this deflationary period:

      That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation–a decline in consumer prices of about 1 percent per year–has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.

      … Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether.

      … But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

      What does the future hold for us? Despite printing a trillion dollars under QE3 (although technically not printing) inflation indexes have all fallen substantially below the 2% floor set by the Fed, going far into the “buffer” Bernanke described in his speech. That’s not a good indicator of the Fed’s power to fight deflation, hence renewed fears that we’re following Japan. For details see Are we following Japan into an era of slow growth, even stagnation?.

      Debt Deflation Spiral

      Also, a debt deflation spiral (“spiral” is the usual term here) can and has occurred. In 22 October 2008 I wrote Debt – the core problem of this financial crisis, which also explains how we got in this mess — just as we began a large debt deflation spiral.

    2. “Also, a debt deflation spiral (“spiral” is the usual term here) can and has occurred. In 22 October 2008 I wrote Debt – the core problem of this financial crisis, which also explains how we got in this mess — just as we began a large debt deflation spiral.”

      Ya and what happened then? The fed began injecting liquidity and deflation was reversed. Nope no deflation spiral here except in your imagination.

      1. Morse,

        Since you don’t define your term “spiral” (which I did not use), we have no idea what you are attempting to say. That deflation is eventually stopped, as during the Depression and in 2008 does, not mean that it does not inflict considerable damage.

        In fact both the US and Japan have experienced destructive periods of deflation in this cycle. In the US, from July – December 2008, down 3.5% (SA). That accompanied the worst downturn since the 1930s, halted only by large-scale fiscal and monetary stimulus (and still continues today at a lower level). Especially QE1, from November 2008 to March 2010 — which took several months to have an effect.

        We don’t know that this represents the worst possible case. It’s disturbing that the rate of inflation has slowed during QE3. Perhaps the deflationary forces have growth stronger, or the economy less sensitive to quantitative easing.

      2. More evidence suggesting — tentatively — that the effect of monetary policy on price levels has declined:

        (1) Japan! But their economy is structurally somewhat different than that of the US.

        (2) UK — more similar.

        (a) Inflation was 5% when Lehman failed in September 2008. The Bank of England has increased its monetary base almost 5x since then (over 5 years), while inflation has fallen to only aprox 2.3% now.

        (b) From September 2011 to now the BoE has expanded the monetary base by 2x, with inflation unchanged.

        Not proof, but straws in the wind.

  5. I find it amazing that FM is so insightful wrt wars, social and political evolution, etc. and is so left-progressive when it comes to economics and the relationship between business and gov. This despite zero evidence in all of history that any country has managed their economy to do better than competing countries : in fact, countries do poorly in direct relationship to the intensity with which they try to manage their economies. There is no country in the world that has implemented Progressive policies and is still doing well. All are heavily in debt, have lousy economies, population structures with too few young workers, and banks that are bankrupt.

    ‘Inflation’ vs ‘Devlation’, the benefits of the Fed, … all assume that economics has some body of knowledge that allows controlling the economy. In addition to there being no empirical evidence for that assumption, we can rule it out with a moment’s thought.

    My profession is control systems. This has been a subject of study since WWII, and now has deep theory and a huge amount of practical experience. We KNOW what it takes to implement a control system :

    0) A sensor grid sufficiently dense and with a response time sufficient to determine the current state of the system to be controlled.
    1) Equations relating the current state to the next state.
    2) Equations providing effector actions to change the next state to a desired state.
    3) Computer systems that can execute the programs / equations within the required time.
    3) Effectors that can direct the system to a desired state.

    Every successful control system MUST have these elements. This also limits the classes of systems that can be controlled: If the system doesn’t allow constructing each element of the control system, it cannot be controlled by an automated system. If the equations cannot be written or there are no adequate effectors, it cannot be controlled by any system, automated or human. If the equations cannot be solved by any feasible computer system, ditto.

    This specifically eliminates the economy as a candidate for control:

    0) Nobody can write either set of equations. If they could, even for a small section of the economy, they could make $Bs in the various markets.
    1) Without the equations, we can’t evaluate what sensor grid is necessary.
    2) The Fed proves to us every day that it doesn’t have the effectors necessary to move the economy to a desired state.

    More generally, the economy is an open, adaptive system. It is open because the economy is affected by weather, sunspots, human social events, and many other non-economic variables. It is adaptive because every element in the economy is continuously trying to improve it’s position. There is no limit to the human imagination, the base of ‘adaptive’.

    Open, adaptive systems are hugely complex, and thus it isn’t possible to do experiments. Experiments are necessary to deduce the cause-and-effect that will be embodied in the equations above.

    The most complex, evolving adaptive system that humanity can control is the human body. After 100 years of ‘scientific medicine’ and 200 years of the scientific study of physiology, biology, microbiology, …, only 15% of people who die in major teaching hospitals die of un-diagnosed conditions. This is with the huge advantages, relative to the economy, of 7B copies of human physiology, 100s of millions of medical records to be used in categorizing disease states, and animal models we can use for experiments to determine cause-and-effect. Those experiments are done in a long list of specialties dealing with biology, e.g. biophysics. Medicine depends upon all that infrastructure to produce the knowledge and training that provides us with 85% (best case) accuracy in dealing with medical problems.

    Economics has no supporting sciences and no ability to do experiments. (OK, behavioral economics, but that is a weak support compared to what medicine has.)

    It is not possible to design and implement controls for an economy. Period. Pretending otherwise does not change reality.

    1. Lew,

      “countries do poorly in direct relationship to the intensity with which they try to manage their economies”

      Seldom have I read anything so contrary to history.

      *. America’s prosperity was planned by a series of government programs, starting with Alexander Hamilton’s “Report on Manufacturers” (1791),
      *. Japan’s rise starting with the Meiji Restoration (1868),
      *. The rise of the Four Asian Tigers starting in the 1960s (Hong Kong, Singapore, Taiwan, and South Korea),
      * German’s resurgence in the 21stC under “Agenda 2010” (e.g., the Hartz labor market reforms).

      Then there are the Nordic nations…

      All these nations profited from State-directed initiatives in free-market economies, and include the most economically successful nations.

      The sad part of these posts about economics is the flow of comments from people indoctrinated with faux history and faux economics.

      The sadder aspect is that responding to them is a waste of time, like talking to the young girls handing out tracts for cults on the street.

  6. Hong Kong was explicitly ‘no controls’, the old Liberal system. The resurrgence of Germany happened after they removed price controls.

    Nordic nations are not a counter example : Sweden backed out of a lot of its progressive policies and has done much better since the last crisis. Denmark hasn’t been doing well. Norway has oil $.

    The Asian tigers had 12-20% growth rates until their govs got serious about managing the economy, and they are now down to ‘normal’ rates, <0% in the case of Japan.

    And, you have no cause-and-effect relationships in all of that, so it is only a claim that 'all of these nations profited from State-directed initiatives'. Laws were passed, and they didn't screw up the economy sufficiently for anyone to notice, the self-organizing system did well for reasons that it is very difficult to understand.

    The problem of building a better economy is precisely equivalent to improving a rain forest. How do you do that? It is very easy to screw them up, but passing simplistic laws such as 'no trees shorter than $7.50 / hour' isn't likely to improve them.

    I note that you did not deal with any of the fundamentals of the control system argument, nor the impossibility of having economic knowledge sufficient to produce such. You waved your hands and produced the standard list of examples that Progressives use, which have very little backing in reality.

    You did not deal with the fact that all nations that have implemented Progressive policies have fallen into the same problems and have miserable 20-year futures. You have no explantions for why they all have crony-capitalist economies where economic inequality is reaching ever-more extreme levels.

    1. Lewis,

      None of those things are remotely correct. But I admire your persistent hold on your faux history.

      Calling Hong Kong “no controls” is quite rich. Their real estate and banking regulatory systems are far tighter than that of the US. Their central bank bought stocks in 1998, a line the Fed has not crossed.

      I could go on, but why bother? Experience shows that nothing will change your thinking.

      I suggest reading some basic history. Even a few hours with Wikipedia, rather than those right-wing websites, would teach you much.

  7. Sorry : ‘You have no explanations for why they all have crony-capitalist economies’ should have been ‘You have no explanations … consistent with Progressive ideology’.

    This site is outstanding in applying serious thinking, rules of evidence, to many aspects of gov and society. But not in the case of economics, where you adopt the standard sloppy and simplistic thinking of the status quo.

    1. Lew,

      ““countries do poorly in direct relationship to the intensity with which they try to manage their economies””

      That’s a bold assertion. Can you cite some supporting experts in economic development (a very large field, drawing on a large historical database)?

      “where you adopt the standard sloppy and simplistic thinking of the status quo.”

      That’s an odd criticism, since you are just making stuff up.

  8. No. When the British ran Hong Kong, it was laissez faire. That was when the country had it’s 20% growth rates.

    You are not dealing with the arguments. Your ‘facts’ are after-the fact cherry-picked correlations, far from cause-and-effect. You would not allow such lousy evidence in your other writings.

    1. Lew,

      I am just pointing out specific examples of your indoctrination. It is probably a waste of time.

      “That was when the country had it’s 20% growth rates.”

      Here we see you just making stuff up. Hong Kong never had 20% real GDP growth (that’s nuts). Their peak GDP growth was 16.2% in 1976, second highest was 13.4% in 1987. Their growth during their glory years usually ran at 6% – 12% per year.

      More generally:

      1. Hong Kong’s government policies changed little after the 1997 return to China.
      2. Hong Kong’s growth rate was roughly similar to that of the other Four Tigers, disproving your assertion.
      3. The Tigers rapid growth rate ended with the emerging market crises of 1997-1998, when they hit the middle income barrier — the transition between the rapid growth on emerging stars and the slower growth of developed nations (China is hitting this now).
      1. Note about these threads about conservatives’ faux history and faux economics.

        We’re not debating values (abortion!), but facts (“countries do poorly in direct relationship to the intensity with which they try to manage their economies”).

        I find it difficult to treat these respectfully (which is the high road). To some extent that’s because these are futile (disproof almost never brings an admission of error). But more so because of the asymmetry. People like Lew respond by making stuff up. To respond I have to spend time on research.

        The combination makes for a substantial waste of time.

  9. You don’t read enough epistemology.

    You are claiming cause and effect, when it is correlation data. Economics does not even rise to the level of weather forecasting in evaluating its results — at least weather forecasters count their failed predictions, whereas economists and you cherry-pick the data. Country A passed some laws, had a set of policies intended to accomplish X, and by god they did, sort of, after varying lags and if you discount the following minor problems … So of course the laws and policies were responsible the results, ignore all those cases where some variation of those laws and policies did not have the effect and all of the unintended consequences of the laws and policies.

    The Communists were most intensive in trying to manage their economies, didn’t last more than 70 years. The various attempts at socialism (Europe, India) were less intensitve, but didn’t last much longer.The Asian tigers were the reverse, and then hit what you call the ‘middle income barrier’ (another economic concept bereft of explanatory power) and what I interpret as their govs adopting policies of advanced nations which inevitably kill their growth rates.

    Lots of things happened in all these sets of countries, nothing is comparable across countries in any detail, it is correlational data. I am likely as wrong as you are, but at least I know why.

    What science is based on correlation data? What control systems run on correlation data?

    You are waving your hands and claiming things that you can’t support, no matter how much research you do. Best case, you can show that, for some countries, the effects of laws and policies don’t have an immediate effect on growth rate, the reverse of what you want to claim.

    And, please name a country that has followed Progressive policies and isn’t facing 20 years of bad road, or worse.

    All of the studies you will find, I believe, are done by economists funded by governments and central banks. There is as much chance of those finding that the policies favored by those entities failed as there is of a Big Pharma study showing that statins don’t work. Ioannidis is the epidemiologist you want to read for more insight into the reliability of scientific studies, but certainly the same problems exist in other fields of study.

    Economics can never have a scientific basis : it is not possible to do experiments on these open, evolving complex systems. It is not possible to do science without experiments. (Yes, astronomy, which is much more rigorous than medicine while also requiring supporting experimentally-based sciences for its explanations of astronomical-level phenomena. Consilience.)

    And it is not possible to do anything that reliably affects reality without the elements of a control system, whether that is entirely in the head of an individual, a spreadsheet, or an automated system. Control systems require cause-and-effect relationships.


    1. Lew,

      Sometimes I do foolish things in comments, violating my standard policy. Here is your statement and my standard reply.

      “countries do poorly in direct relationship to the intensity with which they try to manage their economies”

      Can you cite some economists to support your theory? If true, your statement is the Holy Grail of developmental economics. Nobel Prize.

      If not, then your claim is the usual claims of “I’m better than the professionals.” If only “I” was coaching the Rams, at bat with the Socks, running IBM, Chief of Staff of the Army, President of the USA. Wonderful for discussions at bars, of zero interest here.

  10. I cited 4 examples that I think you will accept : communism, socialism, current progressive policy and the Asian Tigers. Certainly the Asian Tigers were held up as ‘low total gov burden’ examples, widely used back in the 1980s when regulatory states all around the world were being trimmed. You have not named a country that has followed Progressive policies that is not in the state of massive debt, failing banks, flat-to-down economy and unbalanced population structure.

    So those should support “countries do poorly in direct relationship to the intensity with which they try to manage their economies”.

    As for citing economists, I think von Mises does fine. Any gov action that affects prices changes the incentives of all the players and leads to suboptimal investments.

    And, as I understand there can be no substance to economics, I am perfectly satisfied with my argument about the structure of reality dictating what they can expect to accomplish and what we allow them to do.

    Let me do that again with a different argument.

    Economics is a subset of history. It only has data about the past, correlations of X accompanies Y. We do not rely on history to guide our governments, recognize that it may rhyme but rhyming narratives constructed on a poorly documented and understood past are not a reliable guide to the future, to current actions. We see that history is rewritten every generation or 2 based on new understandings in , and that its Truth is very conditional on the latest understandings, release of documents, …

    Economics doesn’t even meet that level of scholarship. At least archaeology and sociology provide other inputs to history, and anchor their theories. The study of the ways that the study of history can go awry is quite advanced : David Hacket Fisher’s “Historians Fallacies” for this. (I am willing to bet that I can find examples of many of those fallacies in the economics papers you rely on to support the view that economic management is possible.) There is no anchoring science or field of superior scholarship underpinning economics.

    And do read Ioannidis. His work has made serious science re-evaluate their work and processes, groups of prominent scientists in every area are replicating the most fundamental experiments of their field. One example I read had 15 attempts at replication, 2 failed and 3 or so found weaker effects. Ioannidis’ model predicts that 50% of all peer-reviewed scientific papers are incorrect, and that that probability is higher in popular fields. His data includes such points as ‘papers funded by drug companies generally get positive results’, and ‘the first paper on a new subject shows bigger effects than later papers’.

    Economics is not exempt from the same social and academic pressures that produce those results in hard sciences, and so I heavily discount your evidence, even considered as historical evidence.

    No experiments at all. And therefore there can be NO control system for an economy that actually does what is intended. And therefore we should prevent politicians from trying to do so.

    And, btw, Taleb does a different version of all of this, much more profound understandings than I have. I will cite a successful contrarian investor over even von Mises.

    1. Lew,

      “I cited 4 examples that I think you will accept : communism, socialism, current progressive policy and the Asian Tigers.”

      This is really simple. You are asserting a rule (i.e., relationship, law) that would be one of the biggest insights in developmental economics in decades, perhaps generations. On the scale of the Fama-Hansen and Schiller work for which they got the Economics Nobels in 2013.

      If you can cite economists who support your theory, fine. That would be interesting.

      If you think your theory is correct, write it up and submit it to a journal. Report back on their reply.

      If you are just playing Fantasy Football-like economics (what if Lew was a Professor of Economics instead of an NFL coach?) then I’m not interested. Save it for the boys at the pub.

  11. As for your false dichotomy : Wrong or Nobel Prize. Economics is not the first ‘profession’ to be shown to be based on nada, and not the first to persist despite that wide-spread understanding. Psychiatry, clinical psychology.

    In your calculations of the usefulness of economics, please include the 10s of Ms of people who died as a result of the economic advice given to India, for example. Off the top of my head, that is the biggest total since Semmelweis’s colleagues ignored him.

    1. Lew,

      “As for your false dichotomy : Wrong or Nobel Prize. Economics is not the first ‘profession’ to be shown to be based on nada, and not the first to persist despite that wide-spread understanding.”

      I congratulate you on your self-esteem. But this comment is too crazy to deserve reply. Anyone saying such things is too far out for help.

  12. You keep making this personal, I assume as a way of avoiding dealing with the arguments. Not Kosher.

    If economics is such a powerful body of thought, how is it that all of the Progressive nations are in the same economic ditch? And how is it that the profession can go on claiming that it can solve problems that it was incapable of preventing?

    That is the fundamental evidence for the usefulness of economics.

    1. Lew,

      I asked if you could provide any citations from economists supporting your theory. Your reply:

      “You keep making this personal, I assume as a way of avoiding dealing with the arguments.”

      That looks like a “no” to my question. Thanks.

      I’m done here. You can rant about your super-science skills, far superior to those of economists. I have to do actual research for the next post.

  13. I did cite economists, von Mises and the Austrians, and also Taleb, who has a better mind than you and me.

    Your entire argument has been one of appeal to authority, and has not even attempted to refute any of the arguments wrt the evidence that economics is based upon and the limitations those imply for what the field can actually accomplish. You have not even provided one example of a nation that has been guided by Progressive policies that has done even OK as a result. I gave you the range of examples, communism through laissez faire, all in the modern world, and you ignored their import.

    This was not a rant, it was quite a well-constructed argument from both rules of evidence and real-world results. IMHO, of course.

    And you have dealt with none of those arguments, instead prefer to consider me a crazy, a rightist conservative of some sort. Not kosher.

    1. Lew,

      By “cite”, I don’t mean pull a name out of the air and attribute your views to him. Like you do with von Mises and Taleb. That is a highly reliable sign of a crank (e.g., common on climate discussions, where doomsters incorrectly attribute their beliefs to the IPCC, which in fact says otherwise).

      I am quite familiar with Austrian economics, and never seen anyone say there is simple relationship of regulation with growth. Some regulation is necessary, but like everything else there is a point at which there is too much — complicated by another factor, quality of implementation and enforcement

      The historical record shows that many high regulation nations have done very well in the post-WW2 era: Nordics, Northern Europe, East Asians all high on the list. Strongly interventionist nations — like the US for many parts of its history (such as the high-growth years after WW2, 1955-1970) — also do well. Extremely low regulation societies (e.g., Somalia) do poorly.

      That you are not aware of this is sad, but apparently unfixable.

      As for your belief that you know better than economists, cranks abound in discussion threads. Lots of people believe they know better than scientists — such as astronomers (solar cycle cranks, barry center & electromagnetic influences enthusiasts, etc), geneticists, dieticians, climate scientists — blah blah blah. Talking with them is a waste of time.

      As is this thread. It’s nice to know how smart you think you are, but you are wasting our time. Please post a expert supporter, last request.

      1. Lew,

        Re: citations

        Note the citations given in posts on the FM website. Even quotes get citations (important since so many commonly given ones are bogus): title, author, source, date, and URL (if online).

        Ditto in my comments (although not always, as comments are many and my time scarce).

        It’s IMO the only fair way to do this. Without full citations comments become a dorm room bull session. There are thousands of websites for that. We try to run this as a different sort of discussion.

  14. Fabius Maximus :

    Glad you are back. I quite agree with you about the necessity of being able to support one’s statements, one method of which is citations, but logical argument seems to me to be acceptable also.

    We have been discussing two threads intermixed : fundamental data of economics and the limitations that type/quality of data imposes and the historical evidence that economic prescriptions have or have not worked. Clarity requires that we separate them.

    This post will deal with the first, as dealing with the 2nd is only possible after we agree, or at least understand each other’s positions, on this level.


    I have worked in several areas where it is easy to collect data, but very difficult to understand what it means. Colleagues have worked in several others and have the same experiences, problems.

    For instance, tuning a database or computer data processing system or computer control system or network. It is relatively easy to collect quantitative data : at this time an HTTP request was received, at this time the DB received the resulting request, … The tools we have to collect this data are impressive, as we can follow individual requests through the various queues, complete with timestamps. We write a lot of tools for summarizing and analyzing that data, have specialists in performance tuning, yet identifying bottlenecks in the system is not easy, it always takes a lot of trial and error. For example, most attempts at fixes merely move the bottleneck from one queue to another, or cause the supposed internal manifestations of the bottleneck to disappear while not changing actual performance. Rarely is the problem so simple that fixing one problem fixes it, e.g. speeding up searches of entries in a file system that was a major bottleneck as ISPs provided logons for Unix systems 20 years ago. By now, all of those simple bottlenecks have been removed from OSs and libraries.

    I have talked to a lot of smart people about this particular problem, e.g. Linux kernel developers, network engineers, and Oracle DB architects. There are no shortcuts, it takes a lot of testing, a lot of analysis and a lot of trial and error. It normally takes years for new ideas to go from a first implementation to being included in the Linux kernel, and ditto for DBs and networks. It normally takes months for re-tuning after major changes to a data processing, control or network system.

    Computer systems are quite simple compared to the systems within which we live. Computer systems under test are closed systems (no input from the outside except what we provide) and are usually not adaptive (evolving) except possibly in low-level use of buffers, scheduling, etc. Also, we have much more information about their internal workings. Yet, using our best tools and thinking, improving their performance requires trial-and-error, more evolution than design.

    In all areas of study, we have a data set from a complex system, even a complex evolving system, and the requirement to extract concepts from it which explain the data and allow prediction and control. Even for experimental data, that is non-trivial : Experimental psychology has series of experiments continuing over 30+ years with continuous re-interpretation of the data based on new control groups, and the associated discarding of the previous concepts. Ditto even relatively new fields such as sociobiology, so I believe that all areas of experimental science have examples of that process in normal science, even ignoring Kuhn’s paradigm shifts.

    Non-experimental data makes extracting knowledge even more difficult because there are no clear-cut contrasts of experimental vs control groups with everything else held constant.

    History is, I believe, as advanced in dealing with such data as any field. History as a discipline is quite sophisticated in extracting meaning from historical information, and the limitations of the understandings which can be extracted are well known : there are both far too many things that are different from historical example to example and far too many possible causes driving each effect to derive firm conclusions. That is true no matter how many historical examples are analyzed. So the best guidance available from history is a set of historical examples which are hypothetically parallel to the present problem that can be used enhance the analysis of the present case. That is useful if the historical examples are in fact parallel to the present case in the relevant dimensions. But that ‘parallelism in the relevant dimensions’ is always a hypothesis that is untestable because we can’t know what the relevant dimensions really are, and so they can mislead as well.

    That limitation is inherent in the quality/type of the data, and an obvious result is the paucity of concepts that explain history and are useful guides to managing our futures.

    It is also the limitation in economic data, both that used in economic models to predict (generally badly) and in the historical data used to support gov policies.

    For that reason, I find it impossible that economics can provide the kind of policy guidance required to produce the results you claim.

    We don’t depend on historians to guide gov policy. So either history is under-valued (and I am wrong in some part of the above argument), or economics is over-valued as a guide to actions in attaining a desired future.


    I am far from the only doubter of economic’s usefulness, google for ‘can economics be a science’. Links are all over the map for quality of thinking, so you shouldn’t accept my citations.

    This is a weak effort from a recent Nobel Prize winner to refute Taleb, doesn’t succeed IMHO:–shilleron-whether-he-is-a-scientist

    Prominent people responding to an NYTimes opinion piece by Raj Chetty :

    This is an attempt to make economics seem useful whether or no it can be considered a science, seems to me to do the reverse :

    This is an attempt to make economic research similar to other science, claiming that it tests hypotheses. The paper does indeed do that, but only in the same sense that history does, and concludes that the field is permanently hindered by not being able to do experiments.

    A better response to Raj Chetty’s NYTimes opinion piece. His claim that economics can identify market failures must be bogus, as that requires a complete understanding of the system:

    A good response to Chetty that makes it explicit that ‘natural experiments’ are done with historical data:

    Other response to Nobel Prize awards :

    From these and many other articles, papers and books I have read over the years, it seems to me that outsiders who would like to use economic results are doubtful of the usefulness of economics. Me too.


    Extracting meaning from data sets is a specific case of the general problem of induction, and of the (same, I think) problem of predicting the future from historical data. Taleb’s writings are very good in the latter (and I think he considers them the same problem), but many philosophers have discussed both. I think the understandings of epistemology wrt these areas are solid and well-accepted : induction is very error-prone, the past is a poor guide to the future, and yet we must use it as it is the best tool available in a wide variety of problems.

    The citation that I would like to provide is one covering the meanings that can be extracted from different data types. Unfortunately, I don’t know of such. The stuff I recall, e.g. Stevens (Harvard, 1940s, nominal, ordinal, etc. data types) is not directly relevant and/or wrong, while other discussions center on experimental data and appropriate statistics, how to do historical research and dozens of other topics found by all the searches I have done so far.

    If such exist, they are lost in the noise of google’s search results, I gave up after looking at 100 links for each search. Or they haven’t been done because everyone thinks it too obvious, too trivial.

    Citation or no, I believe the above rests on solid facts and logic. Certainly it is specific enough to be refutable.

    1. Lew,

      I appreciate your display of self-confidence, especially in escalating from your original daft statement about a linear relationship between regulation and economic growth to a disproof of basic economics. I’m not interested.

      Further comments are blocked.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top
%d bloggers like this: