Is Central Banking Pseudoscience?

And what the hell is water, anyway? SPECIAL OPPORTUNITIES [The Oxford Club Special Opportunities]( Note From Managing Editor Aviva Hauser: The markets are at their most volatile since July, with the S&P 500, the Nasdaq and the Dow slipping over the last few days. [But that's no reason to be concerned.]( You may be thinking that's crazy talk, but in fact, you don't have to worry about the market taking you on a dizzying roller-coaster ride... [because there's a way to help safeguard your investments through it all](. In fact, we're so confident in this system that we've taken to calling it "recession-proof." Looking back over the last 20 years, it could've vastly outperformed the S&P 500. In testing, while the S&P is up 587% over the last 20 years... this strategy could've produced 4,048%. You don't hear those numbers every day... [So if you'd like to essentially "recession-proof" your portfolio, just check out the Oxford Centurion system here.]( --------------------------------------------------------------- Is Central Banking Pseudoscience? Matt Benjamin, Senior Markets Expert, The Oxford Club [Matt Benajmin] Is the Federal Reserve raising rates too fast or too slowly? Market analysts (yours truly included) have spilled barrels of ink in recent months considering this question. But there are a couple of questions that are not being asked at all right now as the Fed continues to hike rates at a pace that could tank the labor market, the economy and the stock market. These critical questions should cause us all to take a step back and reconsider what, after all, is going on right now. Oxford Club Member Robert C. reminded us of them in an email last week. (Thank you for writing in, Robert!) "Why do we have anyone trying to determine what interest rates should be?" Robert wrote. "And why can't we just let the market determine what rates should be?" An Unquestioned Consensus To attempt to answer those questions, I'll start with a parable you may have heard, though maybe not in this context. Two young fish are swimming along contentedly when they run into an older fish swimming the other way. The older fish nods at them and says, "Good morning, boys. How's the water?" A bit puzzled, the two youngsters swim on for a bit, and then eventually one fish says to the other, "What the hell is water?" The way I read it, the water symbolizes something so ubiquitous, so accepted and taken for granted, that we no longer even notice it. In our case, the water is the idea that a government institution should be determining the rate of interest we use when we borrow from and lend to each other. That idea is a bit mystifying when you think about what an interest rate really is. It's the price you pay to borrow money. And most prices in our economy are set by the free market, not the government. Yet this idea that a government institution should set interest rates became accepted wisdom long ago. It's closely related to the Keynesian idea (from British economist [John Maynard Keynes]( that when the economy isn't performing exactly the way we'd like it to, the government should intervene to correct it. Such interventions can come through fiscal policy - think of all those stimulus checks sent out by Presidents Trump and Biden during the COVID-19 crisis - or via monetary policy, in terms of the central bank raising or lowering interest rates. "We're All Keynesians Now" Most Americans are unaware that at one time Keynes was considered by many to be a dangerous thinker. When his economic theories reached U.S. shores in the late 1940s, there were concerted efforts by American conservatives to prevent them from being taught in universities. Not anymore! Despite efforts to suppress it, Keynesianism quickly caught on and became dogma in both U.S. political parties. In 1971, soon after he took the U.S. off the gold standard, Republican President Richard Nixon declared that "we're all Keynesians now." Ever since then, the vast majority of U.S. politicians and policymakers have accepted the notion that the government should step in - with tax cuts, spending programs, and interest rate hikes or cuts - when the economy is not performing ideally. That is the water we all swim in today and don't even notice. But Club Member Robert was wise enough to ask how the water is. Not many others do so. Because the idea is very old-fashioned. Austrian economists Ludwig von Mises and Friedrich Hayek argued in the early 20th century that booms and busts in credit were normal and should be allowed to run their course, without government interference. They also said that markets should set interest rates because central banks are prone to push rates to artificially low levels that create asset bubbles and, eventually, busts (sound familiar?). The theories Keynes developed in the 1930s eclipsed those two economists. But there are some who still question the accepted wisdom that the Fed should set the rate of interest. The estimable James Grant is probably the most articulate of them. Grant is author of the Grant's Interest Rate Observer newsletter. He's been writing for decades that by setting interest rates instead of letting the market do so, the Fed is distorting the price of money and creating instability and bubbles in the system. Interest rates, Grant recently wrote, "are the critical prices that measure investment risk and set the present value of estimated future cash flows." And without accurate prices set by borrowers and lenders in the free market, investors and other economic actors are bound to make miscalculations that lead to bad outcomes for everyone. Grant has also called modern central banking "pseudoscience," adding that "to base action on it is a species of recklessness that people will finally come to realize as such." Now, to be clear, I'm not saying I agree with Grant completely. Before the Fed was established in 1913, booms and busts were much more frequent in the U.S. economy, and the Fed's policies have helped avoid some of those and smooth the trajectory of the economy. But I do think we've entered an era of central bank hubris, when too many people consider the Fed to be all-knowing and all-seeing, with all the wisdom needed to guide the economy on a perfect path. A Call for Humility Renowned economist and Nobel Prize winner [Milton Friedman]( was perhaps the greatest scholar of monetary policy in history. And even he found the money supply and interest rates - and how the economy would react to changes in them - extremely difficult to predict. Thus he called for a good dose of humility when it comes to the central bank trying to steer the economy with any degree of precision. "In the present state of our knowledge [of monetary policy and the economy] we cannot hope to use monetary policy as a precision instrument..." he told a congressional committee in 1959. "The attempt to do so is likely merely to introduce additional instability into the economy, to make the economy less rather than more stable." Let's hope our current central bankers can recognize that. Invest wisely, Matt SPONSORED [Bear-Proof Your Portfolio]( [No Bear]( It's not bonds, gold, cash or crypto... [But one simple tweak to the way you buy stocks could change everything.]( Since our backtesting started this year, we're looking at 24% gains... while the market has tanked! 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