I read John Mauldin’s newsletters. In the most recent one, he published what Dylan Grice said about trust in economics. It reflects my own views, so I want to quote the the piece a little bit, and add my own thoughts.
Of the many elemental flaws in macroeconomic practice is the true observation that the economic variables in which we might be most interested happen to be those which lend themselves least to measurement. Thus, the statistics which we take for granted and band around freely with each other measuring such ostensibly simple concepts as inflation, wealth, capital and debt, in fact involve all sorts of hidden assumptions, short-cuts and qualifications. So many, indeed, as to render reliance on them without respect for their limitations a very dangerous thing to do. As an example, consider the damage caused by banks to themselves and others by mistaking price volatility (measurable) with risk (unmeasurable). Yet faith in false precision seems to us to be one of the many imperfections our species is cursed with.
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One such ‘unmeasurable’ increasingly occupying us here at Edelweiss is that upon which all economic activity is based: trust. Trust between individuals, between strangers, between organizations… trust in what people read, and even people’s trust in themselves. Let’s spend a few moments elaborating on this.First, we must understand the profound importance of exchange. To do this, simply look around you. You might see a computer monitor, a coffee mug, a telephone, a radio, an iPad, a magazine, whatever it is. Now ask yourself how much of that stuff you’d be able to make for yourself. The answer is almost certainly none. So where did it all come from? Strangers, basically. You don’t know them and they don’t know you. In fact virtually none of us know each other. Nevertheless, strangers somehow pooled their skills, their experience and their expertise so as to conceive, design, manufacture and distribute whatever you are looking at right now so that it could be right there right now. And what makes it possible for you to have it? Exchange. To be able to consume the skills of these strangers, you must sell yours. Everyone enters into the same bargain on some level and in fact, the whole economy is nothing more than an anonymous labor exchange. Beholding the rich tapestry this exchange weaves and its bounty of accumulated capital, prosperity and civilization is a marvelous thing.
So now we know we have a slightly better understanding of who pays: whoever is furthest away from the newly created money. And we have a better understanding of how they pay: through a reduction in their own spending power. The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of why their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they find rents too expensive they blame landlords, and soon. So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don’t know who the enemy is, so they create an enemy.
We live in unusual times. Long-term valuation measures are flashing red. Some short-term measures are flashing green. Marginal productivity of capital is declining, and so firms use excess cash and borrowing capacity to pay dividends and buy back stock, because profitable organic growth opportunities are few. That is not a great environment to be long stock.
Further harming the environment is the tight coupling of government policies on monetary policy and the deficit. Thus, even with bonds, I’m playing it relatively safe. To me, this is mostly a time to preserve capital.
Economic growth requires trust in society. Without trust, there is no growth. That means policies and laws have to be long-term & dependable. When things change too much, economic actors slow down, because it takes time to work through change. (And that’s another reason why the PPACA will be a job-killer, and slow down the economy. It is too big, too complex, too burdensome — it was not designed to extend healthcare, but to destroy the relatively good pre-existing private system.
I am not surprised that growth has slowed; I am surprised that markets are as high as they are. When the Fed finally overreaches their abilities, we will painfully learn the governments and central banks are not omnipotent, and that they more often hinder our prosperity than not.
By David Merkel, CFA of Aleph Blog