It’s a very simple question, this. But everywhere I turn, people are constantly trying to do this very thing – no matter how futile it may be.
As Samuel Brittain at the FT said, “regular business cycles existed in the eyes of the beholder and that there was simply an irregular wave-like movement.”
During the “Great Moderation” of the late 1990s and early 21st century, it was not only Gordon Brown in the UK who announced the end of “boom and bust”. Many other politicians and economists in different countries said much the same, if less stridently. Hardly any authority is saying that now.
Indeed. Because you can’t fight Mother Nature. Elliot Wave theory talks about cyclical patterns in stock markets, and of course, there is the Chinese proverb which says wealth does not pass three generations. I imagine that someone spouting about these things would look foolish, even naive in Brownie’s eyes. But Greenspan believed, as Professor Salerno’s post at Mises.org succinctly states “business cycles are a source of wonderment rather than a subject for rigorous logical analysis.”
You would think that point of view would mean Greenie thought fighting Mother Nature was useless. Au contraire, mon frere.
For the Fed is cast in the role of a vigilant and indispensable protector of the market economy, continually operating to monitor and contain the unruly forces of inflation and recession that constantly threaten to emerge from the economy’s dark-side. Moreover, the very mystery that Greenspan claims enshroud the workings of the business cycle provides a ready-made excuse to absolve the Fed from all blame on the occasions when its best efforts at containment go awry and the business cycle is loosed upon the economy.
A troubling question immediately suggests itself, however: If indeed the business cycle is beyond rational analysis, how then can we depend on the Fed to control or mitigate it? The answer, according to Greenspan, is to completely ignore economic theory and to pore over the economic data on a daily or even hourly basis, trusting to his own intuition to discern the future movements of the economy from the signals that are secreted deep within the ceaseless flood of data.
So there you have it: endless data mining, autoregressive model building in SAS or Matlab (which are are great software packages, by the way), and, for all we know, recitation of spells from Hogwarts. Or is it the Dark Side of the Force? Doubt it. No self-respecting Sith Lord would ever wear those buffoonish horn-rimmed glasses that he wore.
But that’s how monetary policy was conducted then, and for all of Bernanke’s scholarship on the Great Depression, I don’t get the feeling he does much more. This is the era of the “data-dependent” Fed, after all. And if they screw up, they’ll just plead ignorance.
So the question remains: Why fight Mother Nature?
Consider surfing. I’ve taken it up over the past few years, and I thoroughly enjoy it; even if I spend more time rinsing my mouth with saltwater than I spend actually riding waves. But you don’t go out there thinking you control the waves and you sure as hell don’t go out there when there are sharks, snapping fish, and/or lightning. You have no control over any of those things. If you have any doubts about this at all, go here and look at the photos from this year’s Eddie Aikau surfing tournament. I can guarantee you not one of these guys looks at any of the factors that make or break surf conditions (tides, wave height, wave sets, wind speed/direction) as something that can be controlled nor are they mercilessly agonizing over real-time data hoping they can change conditions to be more favorable.
You just have to come to a place within yourself and accept things as they are, and what they will be.
The best way to do that is to have some grounding in what actual economic theory tells us what we can expect; not by wringing our hands over data minute-by-minute, hour-by-hour.
After all, the Boy Scout motto says: “Be prepared.”