Popular Delusions: Command and Control Economics

Via Zerohedge comes this insightful analysis from Dylan Grice concerning the notion that the Fed can, and should, improve the economy through, among other things, attempting to maintain a CPI (Consumer Price Index) inflation rate of 2%.

Given the fact that the CPI is just a measurement of a set of arbitrarily selected consumer items–it doesn’t account for many of the things we spend most of our money on, such as gas, mortgages, energy, etc–it is demonstrative of the arrogance/ignorance convergence at work when it is used as the basis for technocratic policies; policies that affect, adversely in most cases, infinitely more areas of our lives than what any type of statistical calculation can possibly measure. But, that’s where we are, and that’s where we have been for nearly a century.

The arrogant assumption of knowledge, mixed with good intentions and ‘ends justify the means’ pragmatism, and enabled by technocratic monetary policy, is the biggest problem in our economy. Such assumptions blind a person, or group of people, to anything outside of what they are specifically looking at, and, unfortunately, as I’ve mentioned before, no one is immune from such confirmation bias:

Subjects applied a faulty model – a mental algorithm saying “accept only supporting evidence” – which resulted in a biased assessment of the evidence. “Trying harder” didn’t work because the problem was the faulty model, not the lack of effort, and applying that faulty model with more determination just caused an even bigger error…

The latest from the Fed provides a wonderful example. Undeterred by the latest calamitous failure of CPI targeting regimes (a brief history of which will be presented below), it has announced an explicit 2% inflation target. But why? Would an explicit target have made any difference to the last crisis? Will it prevent the next one? And where did this 2% come from? We don’t know. But we suspect that past uninformed capital market tinkering has failed to control the uncontrollable, and we’re pretty sure these ones will too.

In fact, if such tinkering has in the past been the primary causes of crises, then why won’t this latest attempt – the 2% inflation target – be the cause of the next one?…

Like a driver focused on the speedometer rather than the speed, oblivious to the risk that the speedometer might be faulty, they kept their foot on the gas until they crashed. So focused were they on the stability of the CPI (first chart below), and so convinced that it was the be all and end all of inflation, they missed what was going on in the credit markets (second chart below).

While much of the commentary surrounding the information boils down to typical doom-and-gloom fear mongering blog fodder–i.e. “leading to global conflict, misery and war” and “in the years to come will claims millions of lives”–there’s still a lot of good info there.

Be sure to read it all when you have time; he’s included quite a few detailed charts and graphs to illustrate his points.

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