Where’s the Growth?

By John Mauldin

 Sep 21, 2014
In 1633 Galileo Galilei, then an old man, was tried and convicted by the Catholic Church of the heresy of believing that the earth revolved around the sun. He recanted and was forced into house arrest for the rest of his life, until 1642. Yet “The moment he [Galileo] was set at liberty, he looked up to the sky and down to the ground, and, stamping with his foot, in a contemplative mood, said, Eppur si muove, that is, still it moves, meaning the earth” (Giuseppe Baretti in his book the The Italian Library, written in 1757.

Flawed from its foundation, economics as a whole has failed to improve much with time. As it both ossified into an academic establishment and mutated into mathematics, the Newtonian scheme became an illusion of determinism in a tempestuous world of human actions. Economists became preoccupied with mechanical models of markets and uninterested in the willful people who inhabit them….

Some economists become obsessed with market efficiency and others with market failure. Generally held to be members of opposite schools – “freshwater” and “saltwater,” Chicago and Cambridge, liberal and conservative, Austrian and Keynesian – both sides share an essential economic vision. They see their discipline as successful insofar as it eliminates surprise – insofar, that is, as the inexorable workings of the machine override the initiatives of the human actors. “Free market” economists believe in the triumph of the system and want to let it alone to find its equilibrium, the stasis of optimum allocation of resources. Socialists see the failures of the system and want to impose equilibrium from above. Neither spends much time thinking about the miracles that repeatedly save us from the equilibrium of starvation and death.

And to that stirring introduction let me just add a warning up front: today’s letter is not exactly a waltz in the park. Longtime readers will know that every once in a while I get a large and exceptionally aggressive bee in my bonnet, and when I do it’s time to put your thinking cap on. And while you’re at it, tighten the strap under your chin so it doesn’t blow off. There, now, let’s plunge on.

Launched by Larry Summers last November, a meme is burning its way through established academic economic circles: that we have entered into a period of – gasp! – secular stagnation. But while we can see evidence of stagnation all around the developed world, the causes are not so simple that we can blame them entirely on the free market, which is what Larry Summers and Paul Krugman would like to do: “It’s not economic monetary policy that is to blame, it’s everything else. Our theories worked perfectly.” This finger-pointing by Keynesian monetary theorists is their tried and true strategy for deflecting criticism from their own economic policies.

Academic economists have added a great deal to our understanding of how the world works over the last 100 years. There have been and continue to be remarkably brilliant papers and insights from establishment economists, and they often do prove extremely useful. But as George Gilder notes above, “[As economics] ossified into an academic establishment and mutated into mathematics, the Newtonian scheme became an illusion of determinism in a tempestuous world of human actions.”

Ossification is an inherent tendency of the academic process. In much of academic economics today, dynamic equilibrium models and Keynesian theory are assumed a priori to be correct, and any deviation from that accepted economic dogma – the 21st century equivalent of the belief by the 17th century Catholic hierarchy of the correctness of their worldview – is a serious impediment to advancement within that world. Unless of course you are from Chicago. Then you get a sort of Protestant orthodoxy.

It’s About Your Presuppositions

A presupposition is an implicit assumption about the world or a background belief relating to an utterance whose truth is taken for granted in discourse. For instance, if I asked you the question, “Have you stopped eating carbohydrates?” The implicit assumption, the presupposition if you will, is that you were at one time eating carbohydrates.
Our lives and our conversations are full of presuppositions. Our daily lives are based upon quite fixed views of how the world really works. Often, the answers we come to are logically predictable because of the assumptions we make prior to asking the questions. If you allow me to dictate the presuppositions for a debate, then there is a good chance I will win the debate.

The presupposition in much of academic economics is that the Keynesian, and in particular the neo-Keynesian, view of economics is how the world actually works. There has been an almost total academic capture of the bureaucracy and mechanism of the Federal Reserve and central banks around the world by this neo-Keynesian theory.

What happens when one starts with the twin presuppositions that the economy can be described correctly using a multivariable dynamic equilibrium model built up on neo-Keynesian principles and research founded on those principles? You end up with the monetary policy we have today. And what Larry Summers calls secular stagnation.

First, let’s acknowledge what we do know. The US economy is not growing as fast as anyone thinks it should be. Sluggish is a word that is used. And even our woeful economic performance is far superior to what is happening in Europe and Japan. David Beckworth (an economist and a professor, so there are some good guys here and there in that world) tackled the “sluggish” question in his Washington Post “Wonkblog”:

The question, of course, is why growth has been so sluggish. Larry Summers, for one, thinks that it’s part of a longer-term trend towards what he calls “secular stagnation.” The idea is that, absent a bubble, the economy can’t generate enough spending anymore to get to full employment. That’s supposedly because the slowdowns in productivity and labor force growth have permanently lowered the “natural interest rate” into negative territory. But since interest rates can’t go below zero and the Fed is only targeting 2 percent inflation, real rates can’t go low enough to keep the economy out of a protracted slump.

Rather than acknowledge the possibility that the current monetary and government policy mix might be responsible for the protracted slump, Summers and his entire tribe cast about the world for other causes. “The problem is not our theory; the problem is that the real world is not responding correctly to our theory. Therefore the real world is the problem.” That is of course not exactly how Larry might put it, but it’s what I’m hearing.

Where’s the Growth?
It’s been more than five years since the global financial crisis, but developed economies aren’t making much progress. As of today, the United States, Canada, Germany, France, Japan, and the United Kingdom have all regained their pre-crisis peaks in real GDP, but with little else to show for it.

Where orthodox neo-Keynesian policies like large-scale deficit spending and aggressive monetary easing have been resisted – as in Japan years ago or in the Eurozone debtor countries today – lingering depressions are commonly interpreted as tragic signs that “textbook” neo-Keynesian economic policy could have prevented the pain all along and that weak economic conditions persist because governments and central banks are not doing enough to kick-start aggregate demand and stimulate credit growth at the zero lower bound.

In places like the United States and Japan, where neo-Keynesian thought leaders have already traded higher public debt levels and larger central bank balance sheets for unspectacular economic growth and the kinds of asset bubbles that always lead to greater instability in the future, their policies have failed to jump-start self-accelerating recoveries. Even in the United States, when QE3 has been fully tapered off, I would expect to see the broader economy start to lose momentum once again.

We’ve tried countercyclical deficit spending to resist recessions, procyclical (and rather wasteful) deficit spending to support supposed recoveries, and accommodative monetary easing all along the way (to lower real interest rates and ease the financing of those pesky deficits); but growth has been sluggish at best, inflation has been hard to generate, and labor market slack is making it difficult to sustain inflation even when real interest rates are already negative. 

Call me a heretic, but I take a different view than the economists in charge. To my mind, the sluggish recovery is a sign that central banks, governments, and, quite frankly, the “textbook” economists (despite their best intentions) are part of the problem. As Detlev Schlichter commented in his latest blog post (“Keynes was a failure in Japan – No need to embrace him in Europe”), “To the true Keynesian, no interest rate is ever low enough, no ‘quantitative easing’ program ever ambitious enough, and no fiscal deficit ever large enough.” It’s apparently true even as debt limits draw closer.

While the academic elites like to think of economics as a reliable science (with the implication that they can somehow control a multi-trillion-dollar economy), I have repeatedly stressed the stronger parallel of economics to religion, in the sense that it is all too easy to get caught up in the dogma of one tradition or another. And all too often, a convenient dogma becomes a justification for those in power who want to expand their control, influence, and spending.

Whereas an Austrian or monetarist approach would suggest less government and a very light handle on the monetary policy tiller, Keynesian philosophy gives those who want greater government control of the economy ample reasons to just keep doing more.

Schlichter expands his critique of the logic of pursuing more of the same debt-driven policies and highlights some of the obvious flaws in the pervasive Keynesian thinking:

Remember that a lack of demand is, in the Keynesian religion, the original sin and the source of all economic troubles. “Aggregate demand” is the sum of all individual demand, and all the individuals together are not demanding enough. How can such a situation come about? Here the Keynesians are less precise. Either people save too much (the nasty “savings glut”), or they invest too little, maybe they misplaced their animal spirits, or they experienced a Minsky moment, and took too much risk on their balance sheets, these fools. In any case, the private sector is clearly at fault as it is not pulling its weight, which means that the public sector has to step in and, in the interest of the common good, inject its own demand, that is [to] “stimulate” the economy by spending other people’s money and print some additional money on top. Lack of “aggregate demand” is evidently some form of collective economic impotence th at requires a heavy dose of government-prescribed Viagra so the private sector can get its aggregate demand up again.

Generations of mismanagement have left major economies progressively weaker, involving

  1. dysfunctional tax/regulatory/entitlement/trade policies created by short-sighted and corrupt political systems,
  2. private-sector credit growth encouraged by central bank mismanagement, and
  3. government expansion justified in times of crisis by Keynesian theory.
But rather than recognizing real-world causes and effects, neo-Keynesian ideologues are making dangerous arguments for expanding the role of government spending in places where government is already a big part of the problem.

We are going to delve a little deeper into this thesis of “secular stagnation” posited last year by Larry Summers and eagerly adopted by Paul Krugman, among others; and then we’ll take a trip around the rich world to assess the all-too-common trouble with disappointing growth, low inflation, and increasingly unresponsive labor markets. Then I’ll outline a few reasons why I think the new Keynesian mantra of “secular stagnation” is nothing more than an excuse for more of the same failed policies.

I think we’ll see a consistent theme: fiscal and monetary stimulus alone cannot generate “financially stable growth with full employment.” In fact, such policies only make matters worse. And funny things happen in the Keynesian endgame.

USA: Secular Stagnation or Public Sector Drag?
This latest theory – “secular stagnation” – argues that powerful and inherently deflationary forces like shrinking populations…

… and potentially slowing productivity growth (as posited by Northwestern University professor Bob Gordon)…

 … are adding to the deleveraging headwinds that always follow debt bubbles. According to the “stagnation” theory, structural forces have been bearing down on the natural rate of interest and weighing on the full-employment level of economic growth since the early 1980s; but the slowdown in trend GDP growth has been masked by a series of epic bubbles in technology stocks and housing.

Even before the 2008 crisis, the argument goes, the real interest rate required to restart the business cycle had been trending lower and lower for years, and the average level of growth experienced during business cycles has fallen.

Moreover, it has taken longer and longer to recoup the jobs that were lost in each of the last three recoveries.

It’s hard to argue with the data, but it’s really a matter of how we interpret it. While the five-year-old “recovery” is still the weakest business cycle in modern US history…

… I quite frankly still believe the effects on growth are temporary. Difficult and long-lasting, for sure (as Jonathan Tepper and I outlined in our books Endgame and Code Red), but temporary nonetheless as private-sector deleveraging continues. We have encountered a massive debt crisis and still have a long way to go in dealing with the sovereign debt bubbles that are being created in Europe and Japan – with the potential of one’s ballooning out of control in the US unless we turn ourselves around.

It may take a crisis, but the forces that plague rich-world economies will eventually shake out and usher in a new era of technology-driven growth. In other words, this too shall pass… but continuing with the same old policies is highly likely to create another crisis through which we all must pass first.

Yes, shrinking workforces, private-sector debt overhangs, and technological innovation are making it difficult to achieve “financially stable growth with full employment” (quoting Summers); but governments and central banks are themselves becoming an increasing drag on rich-world economies. Our governments have saddled us with excessive public debt, onerous overregulation, oppressive tax codes, and their attendant distorted market signals; while our central banks have engaged in currency manipulation and monetary-policy overmanagement. Those in power who rely on Keynesian policies almost always find it inconvenient to cut back in times of relative economic strength (as Keynes would have had them do). And if, according to their arguments, the economy is still too weak even in periods of growth to enable the correction of government balance sheets, then perhaps their reluctance has something to do with debt piling up, market signals being distorted, and gove rnments being empowered to encroach on every aspect of the lives of their productive citizens .

My friend Grant Williams used this chart in a speech yesterday. It shows that we have come to need ever more debt just to produce the same amount of GDP. With a deleveraging in the private sector underway, it is no wonder that growth is under pressure.

Debt is simply future consumption brought forward. Another way to think about it is that debt is future consumption denied. But there comes a point when debt has to be repaid, and by definition, from that point forward there is going to be a period of slower growth. I have called that point the Endgame of the Debt Supercycle, and it was the subject of my book Endgame.

As a result of central bank and governmental machinations, Keynesian growth is ultimately debt-fueled growth (either through the swelling of public debt via deficit spending or the accumulation of private debt via credit expansion); and eventually, public and private balance sheets run out of room to expand anymore. It has taken decades for cracks to show up in the prevailing theory, but now the cracks are everywhere.

One place where the crack-up is especially evident is Japan, where an uber-Keynesian combination of aggressive fiscal deficits and a planned doubling in the monetary base started to lift real GDP and inflation numbers last year before falling back into a deflationary trap. Yet the Japanese experience has seemingly convinced ECB President Mario Draghi that similar policies should be implemented across the Eurozone.

Last quarter, the Japanese economy shrank by an annualized 7.1%; business investment fell by 5.1%; and residential spending was down 10%. This is after one of the most massive Keynesian quantitative easing efforts in the history of the world.

So, let’s go to Japan, which may now have to retitle itself “the land of the setting sun,” since it is facing the steepest expected decline in population and in workforce-to-population ratio on the planet.
Land of the Setting Sun

Japan’s long-awaited “recovery” is already losing steam without the effective implementation of Prime Minister Shinzo Abe’s “third arrow” of structural reform, which to my mind was always the most critical element of his entire “Abenomics” project (and of course the most politically difficult). Despite massive fiscal and monetary stimulus and a desperate attempt to boost tax revenues by hiking the sales tax this past April, Japanese GDP collapsed in Q2:

Let’s review how Japan got there.

Prime Minister Abe took office in late December 2012 and, together with his (initially reluctant) colleagues at the Bank of Japan, quickly fired the first two fiscal and monetary policy arrows, which aimed to propel the world’s third-largest economy out of its deflationary trap. The third arrow has yet to fly.

Since January 2013 the Bank of Japan has expanded its balance sheet by 78% (42% on an annualized basis)…

… and pushed the USD/JPY exchange rate to a six-year low of a fraction under 109 yen per dollar as of the market close yesterday.

In true Keynesian form, the Japanese government ran a massive fiscal deficit in 2013, equivalent to 8.4% of GDP. This was its 22nd consecutive year of deficit spending, starting in mid-1992…

… despite the fact that the Japanese public-sector debt-to-GDP ratio is quickly approaching 250%:
While inflation has popped to its highest level since the early 1990s…

… headline CPI has been decelerating since May and could quickly revert to deflation in the event of continued economic weakness, as was the case after the 1997 tax hike… which would then bring on even more “money-financed” deficit spending.

Abe advisor Etsuro Honda was very clear on this point: “Regardless of the next sales tax hike, it could be that additional monetary easing might be called for if inflation and demand fail to pick up and the output gap doesn’t narrow…. I can fully see the possibility that such a situation will occur.”

Of course, the party cannot go on forever. More than twenty years of constant deficit spending and public-sector debt growth have finally led to a situation where debt service and entitlements are crowding out the government’s general budget.

And now the situation is turning dangerous. Japan has been flirting with current account deficits for the past few years, and the trend looks decidedly negative over the coming decade. That, in turn, could force the Abe administration to look for foreign investment to fund its ongoing operations, pushing interest rates up dramatically to the point that debt service and entitlements could consume more than half the annual operating budget.

Bottom line: Abenomics has delivered a bounce in economic growth and inflation, but it’s failing to push Japan into a self-sustaining recovery. Without a detour through structural reforms (which would be quite painful), this road leads to higher public debt balances and even more dysfunction in the medium term, leaving Japan only a shock away from disaster. As predicted here three years ago, I continue to believe that the yen will be over 200 to the dollar by the end of the decade, and possibly much sooner.

Keynesians argue that Abe had the right idea, he just didn’t spend enough and will need to spend a lot more in the near future. In other words, fiscal and monetary stimulus can lift inflation and boost growth in the short term… but the problem is that you can’t have that stimulus if you want to consolidate the national debt and boost tax revenues at the same time.

Some economists would argue that Abe’s policies don’t necessarily have to add to the debt load, as long as the government has a firm commitment from the central bank to monetize the debt along the way. The fact that that would destroy the buying power of the yen doesn’t seem to be a consideration for them. The elderly on fixed incomes might disagree.

So with their highly leveraged banking system and already crushing sovereign debt loads, why wouldn’t the Europeans embrace the same model?

Draghi’s Turn at Abenomics?

I’ve written extensively on the Eurozone in recent months, so I will keep this section brief.

Much of Southern Europe has been mired in depression, with hopelessly slow or negative growth rates, low inflation or outright deflation, and extremely high levels of unemployment (especially among young workers), for several years.

It’s a toxic situation for a multi-country monetary system that still lacks the underpinning of banking or fiscal unions. Demonstrations in the Catalonia region of Spain, inspired by this week’s Scottish referendum, reveal the very real political risks that are only growing with voter frustration.  

Perhaps it was just talk, but Mario Draghi laid out a three-point plan similar to Abe’s in his presentation at the recent Jackson Hole meeting of central bankers. It quickly acquired the sobriquet “Draghinomics.”

Draghi recently cut the ECB’s already-negative interest rates and has promised a large round of quantitative easing. But the core problems facing Europe are not interest rates or a lack of liquidity but rather a structurally unwieldly labor market, too many regulations being dreamed up in Brussels, a lack of capital available to small businesses, and major regulatory headwinds for business startups.

Compound all that with the significant structural imbalances between Northern and Southern Europe, dramatically overleveraged banks, and an obvious sovereign debt bubble, and you have all the elements of a major crisis in the making.

That the Eurozone is a fragile and politically unstable union will come as no surprise to Thoughts from the Frontline readers who have been diligently perusing my letters for the past several years, but it is a critical point that we cannot ignore. How, I wonder, can Draghi even hope for a successful European implementation of a three-point plan like Japan’s – where a leader who started with very strong approval ratings has burned through most of his political capital before structural reforms have even gotten off the ground?

Draghi simply does not have the political power to make the changes that are necessary. All he can do is prop up a failing system with liquidity and low rates, which will ultimately create even more serious problems.

The Failure of Monetary Policy

There are many economists, with Paul Krugman at their fore, who believe that Keynesian monetary policy is responsible for the United States doing better than Europe. I beg to differ. The United States is outshining Europe due to the combined fortuitous circumstances of massive new discoveries of unconventional oil and gas, new technologies, and an abundance of risk-taking entrepreneurs. Indeed, take away the oil boom and the technology boom centered in Silicon Valley, and the US would be as sclerotic as Europe is.

None of the above has anything to do with monetary policy. In fact, I would argue that current monetary, fiscal, and regulatory policy is getting in the way of that growth.

Robert A. Hefner III, chairman of The GHK Companies and the author of The Grand Energy Transition: The Rise of Energy Gases, Sustainable Life and Growth, and the Next Great Economic Expansion, wrote a wonderful piece in last month’s Foreign Affairs, entitled “The United States of Gas” (hat tip, Dennis Gartman).

Consider how much can change in one year alone. In 2013, on properties in Oklahoma in which the GHK Companies hold interests covering 150 square miles, one large U.S. independent company drilled and completed over 100 horizontal wells. Had those wells been drilled vertically, they would have exposed only about 1,000 feet of shale, whereas horizontal drilling allowed nearly 100 miles to be exposed. And rather than performing the 100 injections of fracking fluid that a vertical well would have made possible, the company was able to perform between 1,000 and 2,000 of them. The company’s engineers also tinkered with such variables as the type of drill bits used, the weight applied while drilling, the rotation speed of the drill, and the size and number of fracking treatments.

Thanks to that continuous experimentation, plus the savings from scale (for example, ordering tubular steel in bulk), the company managed to slash its costs by 40 percent over 18 months and still boost its productivity. The result: in 2014, six or seven rigs will be able to drill more wells and produce as much oil and gas as 12 rigs were able to the year before. Since the shale boom began, over a decade ago, companies have drilled about 150,000 horizontal wells in the United States, a monumental undertaking that has cost approximately $1 trillion. The rest of the world, however, has drilled only hundreds of horizontal wells. And because each borehole runs horizontally for about one mile (and sometimes even two miles) and is subjected to ten or more fracking injections, companies in the United States have fracked about 150,000 miles of shale about two million times. That adds up to around a thousand times as much shale exposed inside the United States as outside it.

There is a divide in the United States, and indeed in the world, between those who believe (and the emphasis is on believe) that government in all its various shapes and sizes is the font of all growth and progress and those who believe that it is individual effort and free markets that “move the ball down the field” of human progress. Count me in the latter group.

Government is necessary to the extent that we need to maintain a level playing field and proper conduct, but with the recognition that wherever government is involved there are costs for that service that must be paid by the private market and producers. For example, almost everyone thinks that the government’s being involved in student loans is a public good. We should help young people with education, right? Except that John Burns released a report this week that shows that student loans will cost the real estate industry 414,000 home sales. Young people are so indebted they can’t afford to buy new homes. Collateral damage?

The unintended consequences of government policies and manipulation of the markets are legendary. But often unseen.

Monetary policy as it is currently constructed is only marginally helping private markets and producers. Monetary policy as it is currently practiced is an outright war on savers, which sees them as collateral damage in the Keynesian pursuit of increased consumer demand.

It is trickle-down monetary policy. It has inflated the prices of stocks and other income-producing securities and assets, enriching those who already have assets, but it has done practically nothing for Main Street. It has enabled politicians to avoid making the correct decisions to create sustainable growth and a prosperous future for our children, let alone an environment in which the Boomer generation can retire comfortably.

It is a pernicious doctrine that refuses to recognize its own multiple failures because it starts with the presupposition that its theory cannot fail. It starts with the presuppositions that final consumer demand is the end-all and be-all, that increased indebtedness and leverage enabled by lower rates are good things, and that a small room full of wise individuals can successfully direct the movement of an entire economy of 300 million-plus people.

The current economic thought leaders are not unlike the bishops of the Catholic Church of 16th-century Europe. Their world was constructed according to a theory that they held to be patently true. You did not rise to a position of authority unless you accepted the truth of that theory. Therefore Galileo was wrong. They refused to look at the clear evidence that contradicted their theory, because to do so would have undermined their power.

Current monetary and fiscal policy is leading the developed world down a dark alley where we are all going to get mugged. Imbalances are clearly building up in almost every corner of the market, encouraged by a low-interest-rate regime that is explicitly trying to increase the risk-taking in the system. Our Keynesian masters know their policies and theories are correct – we must only give them time to more perfectly practice them. That the results they’re getting are not what they want cannot be their fault, because the theory is correct. Therefore the problem has to lie with the real world, full of imperfect people like you and me.

What our leaders need is a little more humility and a little less theory.

Washington DC, Dallas, Chicago, Athens (Texas), and Boston

I find myself in the Hill Country north of San Antonio, Texas, attending the Casey Research Summit, where I speak tomorrow. I’m surrounded by many friends in very pleasant circumstances. And when I hit the send button, I will have two days of fascinating conversations ahead of me. I am doing a number of videos with various interesting personalities, which we will post on the Mauldin Economics site in the coming weeks. More on that later.

On Monday I fly back to Dallas, where I will stay until the end of the month, then head off to Washington DC. In the middle of October I’ll visit Chicago, Athens (Texas), and Boston, all in one week.

I can't hit the send button without noting that Jack Ma, the Chinese ultra-billionaire founder of Alibaba, was at the New York Stock Exchange for the launch of his IPO and sought out my friend Art Cashin, saying “I can't leave without a picture with Art Cashin.” As one of Art's friends subsequently wrote on our round-robin group email, Jack is clearly a man who understands who is really running things. The incident also shows that anyone can be a groupie. But what really intrigues me is that here is one of the richest men in the world, a force in China, obsessively focused on creating a merchandising machine, and yet he is so in touch with the world of investment and business that he watches CNBC enough to know who Art is. And to appreciate the character and class that Art has shown us for years – and want to meet him. Jeff Bezos may have his work cut out for him in the coming years.

Have a great week and tell a struggling businessman that you appreciate his work.

Your ready for some fun conversations analyst,
John Mauldin

John Mauldin

Anatomy Of A Market Bubble


  • Malinvestment best explains the US economic policy over the last 35 years - a policy that has produced three major market bubbles.
  • Misallocation of debt created new money – first into housing, and then into stocks – has produced two market bubbles since the turn of the century.
  • $10 trillion in new money has been created since the onset of the recession in 2008 with roughly 65% of it driving stocks and 35% driving the economy.
Market bubbles are the result of supply and demand just like any other dynamic that occurs in the world of economics. Bubbles are best described by what the Austrian School of Economics refers to as "malinvestment." Malinvestment is best explained in the following excerpt borrowed from Wikipedia:
In Austrian business cycle theory, malinvestments are badly allocated business investments. due to artificially low cost of credit and an unsustainable increase in money supply. Central banks are often blamed for causing malinvestments. Austrian economists such as Nobel laureate F. A. Hayek advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction - a boom followed by a bust.
The concept dates back to at least 1867. In 1940, Ludwig von Mises wrote, "The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."
On the subject of malinvestment, Mises and Hayek got it right. But that isn't really the end of the story. We can't summarily dismiss the Keynesian School and adopt the Austrian School as the "be all, end all" on the matter. It is indeed true that when Keynesian stimulus is taken too far or misallocated we create market bubbles that are followed by market crashes. On the other hand, the Austrian School's thinking on money supply is far from being a magic elixir that solves all problems.
An example of the flaw in the Austrian School's thinking is that money should be gold backed. That necessarily avoids the depreciation in the purchasing power of a nation's currency in that it makes money scarce by definition. In fact, under a gold backed currency system the opposite is true in that the value of money would be driven sharply higher as a result of its relative scarcity in relationship to population increases that increase production capacity.

Can a Computer Replace Your Doctor?

AS a former physician, I shivered a bit when I heard Dr. Vivek Wadhwa say he would rather have an artificial-intelligence doctor than a human one. “I would trust an A.I. over a doctor any day,” he proclaimed at a recent health innovation conference in San Francisco, noting that artificial intelligence provided “perfect knowledge.” When asked to vote, probably a third of those in attendance agreed.

But it made sense: Dr. Wadhwa is a professor, entrepreneur and technology visionary. What’s more, the conference took place in San Francisco, where faith in the power of technology and data to solve problems holds unshakable sway.

There was certainly plenty of innovation on display at the conference’s rooftop reception, called “Health by the Numbers”: One device attaches to your iPhone and turns it into an otoscope so you can see if your child has an ear infection; another allows it to check your blood alcohol level. Attendees could check out home cholesterol test kits, and a wearable device to track the “quality” of their breathing.
Silicon Valley is bringing a host of new data-driven technologies to health care, many of them with enormous potential. But before we rush to measure every human attribute in real time, it would be a good idea to ask: When is more data actually useful to promote and ensure better health? And when does technology add true value to health care? The results have been mixed.
“It holds great promise and excitement, but so far everyone is often disappointed with the outcomes,” said Steven J. Van Kuiken, a director at McKinsey and Company who studies technology and health care. “There are lots of interesting ideas, but how do you get data that’s useful to patients, physicians or regulators? And then how do you get them to act on it?”
While the proliferation of fitness trackers suggests there is commercial potential in consumer health data technology, utility may be limited. “I don’t doubt the wearable piece is going to be a productive business model for people,” Ian T. Clark, chief executive of Genentech, said at the conference. “I just don’t know whether it’s going to bend the curve in health outcomes.”
Last month Aetna announced it was discontinuing CarePass, its personalized health data platform for patients, because it hadn’t delivered on anticipated results. And some studies show that half the people who buy portable fitness trackers stop using them in a matter of months. That is probably because most people who wear them are already health-conscious and there may be little long-term value once they take note of their activity patterns, Mr. Van Kuiken suggested.
So how can we create innovative new technologies that will revolutionize health rather than end up as discarded Christmas presents?
One big challenge is that the elusive state we call “health” is not always easily measurable. Normal blood pressure jumps up and down in response to thoughts, hydration and stress. Some healthy people have low platelets or slight elevations of liver enzymes.

In some cases, the ability to collect data has outpaced medical understanding. There is no “normal” testosterone level for an aging male, yet millions of men have been told they suffer from a condition called Low T and are using testosterone gels, even though medical studies have shown the products are dangerous.

In other cases, the data can show up fine, even when the patient is not. You don’t always measure the right thing. When I was in medical school, there was a gallows joke that some patients die with “Harvard numbers.” In other words, the lab tests that were ordered were all perfect, but the patient died anyway.

On the other hand, the test results can look bad even when the patient is fine. Scans of the spine, for example, show that many people have big bulging discs but no back pain. So which do you treat, the M.R.I. or the patient?

One central rule of doctoring is that you only gather data that will affect your treatment. There are now devices that track the activity of your sympathetic nervous system as a measure of stress. But what do you do with that information? Other devices continuously monitor breathing for wheezing that isn’t noticed or audible. Does that matter? Some studies have shown that continuous monitoring isn’t useful for children hospitalized with bronchial infections.

If you were dieting, would stepping on the scale 1,000 times a day help you lose weight? Or consider the treatment of an abnormal heart rhythm. It’s true that constant monitoring for a few days can be highly useful to identify the pattern and what provokes the attacks. After that, though, for many patients a wearable cardiac tracker might simply record normal beats that normal people experience all the time, increasing anxiety for many patients.

Everyone agrees, of course, that useful technology can be lifesaving.

At the Mayo Clinic’s Transform symposium this month in Rochester, Minn., I heard Eric Dishman, a general manager at Intel, explain how he had used data to individualize his own cancer care. More than a decade ago, when he was only partly responding to chemotherapy for a rare kidney cancer, he used a step monitor to help figure out what provoked his pain and then worked with a physical therapist to treat it. More recently, scientists were able to analyze the genetic sequence of his tumor, identifying a medicine for treatment. He is now cancer free.

Likewise, continuous glucose monitors alert sleeping diabetics when their blood sugar drops too low. And some companies are developing chips and other technologies that can perform tests on a drop of blood — perfect for use in remote areas where sterile needles and full laboratories are not available.

There are also apps that provide data for researchers, including one that tracks the movement of asthma patients to see what provokes attacks. That could also help doctors better understand patterns of disease and allow them to adjust doses of medicine, Mr. Van Kuiken said.

So hurrah for technology. But it’s just a tool. Let’s hope we have the wisdom to ignore it, as we would a GPS device, when it leads us in the wrong direction — or nowhere at all.

Elisabeth Rosenthal is a reporter for The New York Times who is writing a series about the cost of health care, “Paying Till It Hurts.”

The Scotland Referendum: Who Voted How And Why?

Tyler Durden 

09/19/2014 07:13 -0400

The following post-referendum poll from Lord Ashcroft does a good summary of who voted how and why. However, the most telling distinction is the following:
  • Voters aged 16-17: YES: 71%; NO: 29%
  • Voters aged 65+: YES: 27%; NO: 73%
How will last night's vote look like in 5, 10 or 15 years when today's 17 year olds are Scotland's prime demographic?

In Scotland and Beyond, a Crisis of Faith in the Global Elite

SEPT. 20, 2014

In Scotland this week, a measure to become an independent country and end the United Kingdom as we know it failed, but it would have succeeded with a swing of just 5 percent of the vote. Earlier in the week, a right-wing anti-immigration party in Sweden claimed its largest-ever share of parliamentary votes. And in the United States, new census data released this week showed that middle-income American families made 8 percent less last year, adjusted for inflation, than they did in 2007.

What these stories have in common is this: They lay bare a crisis of faith in the global elite.

Pulse of the People: Scotland’s Independence Vote Shows a Global Crisis of the ElitesSEPT. 18, 2014
There has been an implicit agreement in modern democracies: It is fine for the wealthy and powerful to enjoy private jets and outlandishly expensive homes so long as the mass of people also see steadily rising standards of living. Only the first part of that bargain has been met, and voters are expressing their frustration in ways that vary depending on the country but that have in common a sense that the established order isn’t serving them.

It was evident not just in last week’s votes in Scotland and Sweden, but also in a wave of votes for parties of the far left and the far right in European parliamentary elections earlier this year, in the rise of the Tea Party in the United States and in instability in Japanese politics that led to six prime ministers since 2007.

The details of Scotland’s grievances with the English ruling class are almost the diametrical opposite of those, say, of the Tea Party or Swedish right-wingers. The Scots want more social welfare spending rather than less, and they have a strong antinuclear environmental streak. (Scotland’s threatened secession was less the equivalent of Texas pulling out of the United States than of Massachusetts or Oregon doing the same.)

But there are always people who have disagreements with the direction of policy in their nation; the whole point of a state is to have an apparatus that channels disparate preferences into one sound set of policy choices. What distinguishes the current moment is that discontent with the way things are going is so high as to test many people’s tolerance for governing institutions as they now exist.

There is simple economic math behind it. Consider the United States, which has had stronger growth than Britain, Japan or Continental Europe since the financial crisis and the deep recession it spawned. The United States economy is now 6.7 percent bigger than it was at the end of 2007.

But that masks what has been a miserable last several years for most working Americans. The Census Bureau said last week that the inflation-adjusted median household income — pay for people at the exact midpoint of the income distribution — was $51,939 in 2013, up just $180 from 2012 and still 8 percent below 2007 levels.

It gets worse. The 2007 peak in real median household income was slightly below the 1999 peak. In other words, a middle-class American family is worse off financially today than it was 15 years ago.

Discussion of the economy generally focuses on things like job creation and the growth of the gross domestic product. But you can’t eat G.D.P. Median income is the rubber-meets-the-road measure of how the mass of Americans are living, and the results aren’t good.

The sense that the system isn’t working for most American workers pervades public opinion polling, including a recent New York Times/CBS News Poll. Seventy percent of respondents disapproved of congressional Republicans, but congressional Democrats fared barely better, with 61 percent disapproval. Fifty-three percent disapproved of President Obama’s handling of the economy; similar numbers disapproved of President George W. Bush at this point in his presidency.

Or, instead of polls, you can look at results, where every election seems to have the potential to be a wave election, in which one side makes major gains. The idea of overwhelmingly electing President Obama and congressional Democrats in 2008 and turning around and overwhelmingly favoring Tea Party Republicans in 2010 may not seem consistent, but it’s what you might expect in a world where the political mainstream has delivered consistently mediocre results.

In Britain, a Labour government led by a Scottish prime minister (Gordon Brown) and his Scottish finance minister (Alistair Darling) supported the so-called financialization of the British economy, with the rise of global megabanks in an increasingly cosmopolitan London as the center of the economic strategy.

Then, in 2008, the banks nearly collapsed and were bailed out, and the British economy hasn’t been the same. That economic failure ushered in a coalition government in 2010 that is even less aligned with the Scots’ preferred policies, bringing an age of austerity when the Scots would prefer to widen the social safety net.

But it is in Continental Europe that the consequences of bungling by mainstream elites are perhaps the most damaging, and the most dangerous.

The decades-long march toward a united continent, led by the parties of the center-right and center-left, created a Western Europe in which there was a single currency and monetary authority. But that authority did not have the political, fiscal and banking union that would make it possible for imbalances among those countries to work themselves out without the benefit of currency fluctuations. When it all came to a head from 2008 to 2012, national leaders were alarmed enough by the risks of budget deficits that they responded by cutting spending and raising taxes.

As such, the imbalances that built up over the years in Europe are now working themselves out through astronomical unemployment levels and falling wages in countries like Spain and Greece. Even the Northern European economies, including Germany’s, are experiencing little or no growth. While the Great Depression of the 1930s brought an initially sharper contraction in economic activity, the European economy is performing worse six years after the 2008 crisis than it was at the comparable point in the 1930s.

In European Parliament elections in May this year, major inroads were made by parties of the extreme right and left. The entire post-World War II effort to build a united Europe will now include parties that use Nazi imagery and those that consider themselves communist. When The Huffington Post can post something called “9 Scariest Far-Right Parties Now in the European Parliament” and not be accused of exaggeration, something has gone wrong in the European project.

The details of the policy mistakes differ, as do the political movements that have arisen in protest. But together, they are a reminder that power is not a right, it is a responsibility. And no matter how entrenched our governmental institutions may seem, they rest on a bedrock assumption: that the leaders entrusted with power will deliver the goods.