While the systemic model, with its top-down, consequentialist policies put in place specifically to produce stability, often produces stability over the short run, it at least as often produces unimaginably wild instability over the long run.
This is a problem that crosses platforms. A common analogy is the fires in managed forests. While top-down policies designed to systematically control and extinguish small fires prevent problems in the short run, the lack of fires to clean out the dried brush ultimately leads to uncontrollable infernos.
I am more likely to write about an almost identical problem on this blog: the Federal Reserve. While top-down policies designed to systematically control and extinguish market phenomena like inflation and unemployment often allow for stability in the short run, the lack of market responsiveness ultimately leads to catastrophic crashes, runaway inflation, and heavy unemployment.
This is something that I have been thinking on quite a bit recently, and I have come to the conclusion that we have to embrace the chaos. Ultimately, we’re in for a wild ride no matter what, so why delay the reckoning? Let’s deal with the problems in incremental and manageable ways, preferably at the level of the individual. The only alternative seems to be waiting for intractable problems later.
The reason I bring this up now is because Motor Trend magazine recently published an article called “The Beginning of the End of Driving.” Read the following excerpt and try to tell me you remain unworried about the systemic vulnerabilities.
Continental plans to have autonomous assistance available for limited freeway driving and for construction areas by 2015, says senior vice president Ralf Lenninger. It will add low-speed city capability in 2017, followed by two-lane highway and country road driverless car technology about the end of the decade. The company calls this “the car you can’t crash,” and it will meet the company’s goal for a zero-percent accident rate.
Here is a link from the Daily Reckoning of Australia, showing why government debt blows up. It has a liberal dose of Bastiat (pun intended), and it draws some interesting parallels between Japan and the United States.
I suggest that you read the whole thing. (It’s not that long, you whiners!) But here’s an interesting excerpt to pique your interest:
What really happens is this: the private sector gets too deeply in debt (thanks largely to the Fed’s artificially low rates and EZ money policies). Then, it panics. It cuts spending. Lenders – who over-extended credit – should go broke.
Instead, the feds bail them out, shifting the public’s real resources to failed businesses and incompetent managers. The bad debt is transferred to the public. Then, the private sector… attempting to build up savings and improve its financial health… puts its money in the safest possible place – government bonds! Still more debt, in other words.
The government takes the money and gives it to its favourite sectors… its clients… its pets… its campaign contributors and vote-getters. The public would be appalled if it realised how its savings were being thrown around. But it wants safety above all. And it believes the feds will be good for the money; they always have been. After all, if you can’t trust the government, who can you trust?
Who can you trust indeed? I’m not in the business of giving investment advice, but I’d suggest tangible assets. Check out the article to see what the stock market has done relative to tangible assets over the last 15 years or so. It will either shock you or depress you, or possibly both.
I was recently made aware of an interesting phenomenon called the “Zero Stroke” or the “Cipher Stroke.” It has an article on Wikipedia, so it must be a real thing.
Zero stroke or cipher stroke was a mental disorder, reportedly diagnosed by physicians in Germany under the Weimar Republic and said to be caused by hyperinflation of the early 1920s. The disorder was primarily characterized by the desire of patients to write endless rows of zeros, which are also referred to as ciphers.
Now that we’re in for the four more years of the Obamar Republic, with Ben Bernanke getting free rein to dump Benjamins out of his fleet of helicopters, I wonder whether the Zero Stroke will return?
Maybe it’s the next big thing in psychology!
Walter Russell Mead, writing at the American Interest, posits “peak China,” a concept much like peak oil. According to Mead:
It may be hard to believe, but it’s been a full four years since China hosted the Olympics. At the time, Beijing 2008 appeared to herald China’s return, after a 500 year hiatus, to great power status. Commentators were falling over themselves to pronounce the inevitability of China’s rise and its implications for American influence in Asia.
But is it possible we will look back on those Olympic Games as the peak of Chinese power, rather than the beginning of its rise?
Yes. There are many reasons why, including demographics, which Mead elaborates upon. I prefer the monetary-governmental explanation.
China will have to confront a series of structural challenges if it is to continue to achieve the kind of dynamic growth that lifted the country from economic backwater to emerging great power in just three decades.
The most obvious challenge is demographics. A RAND study observed that the proportion of the Chinese population of working age peaked in 2011 and began slowing this year. The share of the elderly population is rising. Healthcare and pension costs will soar as a result. So will labor costs. Investment and savings will diminish. In short, China may face the prospect, unknown in human history, of growing old before it gets rich.
I think this is probable, mainly because the growth that China has shown has been a classic case of credit-fueled bubble inflation. (I have written about this before; search “China” on the homepage.)
Of course, my interest in this is theoretical as well as practical. On the practical side, the coming China cataclysm is going to toss the world economy into a crisis of similar proportions to Europe’s coming crackup. And the American government, without any changes, is utterly ill-equipped to deal with it, meaning that it may be the final straw. But that may just be me being a pessimist.
On the more theoretical side, I am at the very least worried that we will draw the wrong lessons from China’s coming massacre. The narrative will undoubtedly read: 1) China “adopted capitalism,” 2) China saw some growth, 3) China collapsed, and therefore 4) capitalism is to blame.
This is 180 degrees from the proper interpretation, and I hope to write more about this in the future. A state-controlled economy with capitalist-leaning reforms magnified by cheap credit absolutely does not make a free market.
But I feel like I’m a voice in the wilderness. Some still look to China as a beacon, while others, acknowledging China’s foundation made of sand, offer up the same tired Keynesian platitudes that put America $5 trillion more in debt over the last 4 years, while accomplishing nothing by way of recovery or sustainability.
Perhaps it’s time people starting acknowledging instead that money has consequences. Those consequences are wonderful when the money is sound; they are terrible when the money is ginned up by the state.
Not that this hasn’t been noted elsewhere in these pages, but it is nice to see even a default pro-regulation publication like The Economist take on the monster (monstrosity?) that is Dodd-Frank. When even the Economist, which has hardly met a regulation it didn’t like, calls your law “too big not to fail,” you know you’re in for some seriously scary stuff.
I will briefly excerpt the article here, but the whole piece is worth reading.
The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. Voracious Chinese officials, who pay close attention to regulatory developments elsewhere, have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one outside Beijing (your correspondent is a tired-eyed exception to this rule). And the size is only the beginning. The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: “Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.” Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.
…Another product of Dodd-Frank is a plethora of new government powers and agencies (see chart 2) with authority over areas of the American financial system and economy affecting veterans, students, the elderly, minorities, investor advocacy and education, whistle-blowers, credit-rating agencies, municipal securities, the entire commodity supply chain of industrial companies, and more. Quite a lot have tasks already done by others—frustrating the act’s worthwhile objective of consolidating fragmented pre-crisis supervision. A new office within the Treasury department is intended to forecast and head off disasters—already a goal of research groups at the 12 regional Federal Reserve Banks, the Federal Reserve Board, the president’s Council of Economic Advisers and numerous federal agencies, not to mention universities, think-tanks and private firms.
The problem, of course, is not that we have too few agencies, bureaucrats, and “experts” working on the issue. The problem is that the issue is fundamentally unsolvable without a crystal ball. Tasking people with heading off crises before they happen is not only the height of hubris, it more often than not exacerbates the crisis that ultimately happens anyway.
And then the cycle starts over.
Pointing out unintended consequences is a bit of a hobby of mine. On the one hand, I enjoy finding stories like the ones that follow. On the other hand, it’s incredibly frustrating, because these consequences could have been avoided with just a little critical thought. Anyway, enjoy part 4,438 of an ongoing series about unintended idiocy:
Tougher Fuel Economy Standards Lead to Worse Fuel Economy?
Autoblog has a post about a new study out of the University of Michigan, which shows that the recent redesign of the fuel economy standards is likely to lead to the building of larger vehicles, and with it, lower overall fuel economy.
A study by the University of Michigan shows that auto manufacturers could meet tougher fuel economy standards simply by increasing the size of the vehicles they sell. A “footprint-based” formula for calculating mileage targets was adopted when Corporate Average Fuel Economy standards were revised in 2007. Researchers now think this could lead to bigger vehicles on the road rather than increases in fuel economy for our nation’s fleet.
“It’s cheaper to make large vehicles, and meeting fuel-economy standards costs [manufacturers] money in implementing and looking at what consumers will purchase,” one of the researchers told Automotive News.
In this case, I do not really mind the unintended result. I think of a fleet of reasonably-sized cars with relatively poorer gas mileage as preferable to a fleet of tiny, European-style cars with relatively better gas mileage. I think the single-minded pursuit of fleet gas mileage has led to a decrease in overall driver safety, an increase in price, and general lowering of the standard of living.
Remember that automotive fuel mileage is but a portion of overall carbon and pollutant emissions, and the widespread availability of cars over clearly inferior modes of transit is a huge part of our comfortable living standard. Cars are really useful to real people, and the balance of harms strongly indicates, in my opinion, that a few more miles per gallon in the fleet average will not produce the overall benefits that regulators assume it will.
Lower Credit Card Fees Lead to Higher Prices?
The Durbin Act that took effect on October 1, 2011 compelled the Federal Reserve to act in its regulatory capacity to cap the fees that
credit card companies charge retailers to accept their cards as payment (“swipe fees”) at a “reasonable” level.
CNBC is now reporting that an industry group has found that lower fees are correlated with higher prices to the consumer. In other words, by capping the fees that credit card companies could charge retailers, the Fed has failed to induce retailers to pass their lower prices on to consumers. In fact, in a plurality of cases, prices actually went up.
Retailers have been vocal against the high swipe fees because they said the fees would add to the product prices, and if the fees were lower, they could pass along those savings to consumers translating into lower prices.
Well, its been a little over two months since the Durbin Act has been implemented, so how are consumers fairing? [sic] The Electronic Payment Coalition (EPC) which represents credit card giants, and the regional and independent bankers
…[An EPC spokesperson said] “Our research looked at 21 different retail locations in six different U.s. cities out of those locations. 12 raised prices by five point one percent or kept prices the same, four stores kept the same prices and five stores lowered the price by an average of five point eight percent.
…In the last two months if you at the industry as as a whole, [the retailers] have seen an additional $825m in profit.”
Price controls never seem to work out the way politicians want them to work. The Durbin Act was not initially conceived of as a punitive act against the credit card companies; rather, it meant to help consumers with lower overall prices. In the latter it has so far failed.
The incentive on both sides of the regulation (i.e. credit card companies and retailers) is the same: maximize some combination of margin and volume in order to maximize net profits. I fail to see how handicapping one side would induce the other side to magnanimity.
No corporation I know of will, all else equal, leave money on the table out of the goodness of their heart. The savings coming from restrictions on card companies will go straight to the retailers’ bottom line.
And in addition to the redistributionist tax/subsidy scheme between card companies and retailers, it seems that consumers are not seeing any benefit. It might be early to call this bill a failure, but its prospects were never very good anyway.
Read the entire interview for the context and a statement of conflicts.