The predilection for today’s nominally smarter, better, tougher, and more highly evolved institutions to unconsciously mimic their predecessor institutions has always fascinated me. For example, today’s Chinese Communists are exactly re-treading the inflationary, confiscatory, crony-capitalist path of the latter-day Guomindang (KMT).
Another example: today’s neoclassical economists are succumbing to the same hubris of central management that ruined the paleo-Keynesian brand in the late 1970’s.
Many of today’s most truly capitalistic market participants consider themselves Democrats, whereas the “banker socialists” are much more disproportionately “laissez-faire” Republicans.
Today, we are told (over and over again) that neoclassical economics has won unqualified supremacy in the marketplace of ideas. Yet many of the very same neoclassicist triumphalists now beat the drum for “maintenance of demand” in the housing market, for example.
Government ministers also grudgingly adhere to capitalist principles; yet we hear more and more of governments “guarding” against “irrational” price movements.
Markets are highly imperfect, but they are the closest approximation we have to collective rationality (is that an oxymoron? oops). No market movement is “irrational” except as a consequence of an irrational government policy choice. “Market irrationality” is a consequence of individual participants’ shrinking time horizons — they must ignore seemingly vital information because their demand for cash takes precedence over all else.
BRUSSELS (Reuters) – Finance leaders from the Group of Seven industrialized nations discussed collective action to calm markets if price moves become irrational, Eurogroup Chairman Jean-Claude Juncker was quoted as saying on Monday.
Juncker, who chairs the Eurogroup — the monthly meetings of euro zone finance ministers and the European Central Bank — told the Luxemburger Wort newspaper in an interview that turbulence on financial markets could continue for months.
“We are not yet at the end of the market crisis,” Juncker was quoted as saying.
“The corrections will drag on for a few weeks, months. We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets,” he said.
Asked what form such collective action may take, he said:
“Whoever has a strategy, should not set it out. Otherwise it will lose its effect if it is explained.”
Finance ministers and central bankers from the G7 — the United States, Canada, Japan, Britain, France, Germany and Italy — said on Saturday in Tokyo that financial market turmoil was serious and persisting.
They also said more work was needed to restore markets to good working order and safeguard global growth.
Juncker told the Luxemburger Wort that European economic fundamentals were solid although growth would slow this year from last year’s estimated 2.6 percent expansion.
“We will reach growth in the euro zone of 1.8 percent, which is about our growth potential. The European economy is robust,” he said.
He reiterated that the euro zone did not need the kind of monetary and fiscal stimulus that the United States has decided on to stave off recession.
Repeat after me: deflation is the market’s cure for an abnormally low aggregate savings rate. Deflation is not irrational. Deflation is not the enemy.
Americans don’t save, because government stupidity punishes saving. Everyone on Wall Street certainly knows what a joke official inflation statistics are. A rapidly growing cohort on Main Street is finally learning. What the central bankers do not understand is that precisely when they think they have credit deflation under control, Main Street sees a history of prices having risen much more quickly than official statistics say; so they reject the official inflation metrics, demand much higher wages, get them, and thenceforth drive prices higher. Thus, consumer price inflation can soar even when debt markets are imploding. That’s what we’re seeing now, and it takes years for the economy to work its way out of that cycle.
The more things change, …