The Inability to Quantify Human Action

Greg Ip wonders how the economists got it so wrong. Larry Summers looks like a genius, using “back of the envelope” calculations. Were you forwarded this email? [Sign-up to Rude Awakening here.]( [Unsubscribe]( [The Rude Awakening] The Inability to Quantify Human Action - Economists are scratching their heads, wondering how they got it so wrong. - Larry Summers looks like a genius, using “back of the envelope” calculations. - The mathematical models used in economic analysis aren’t fit for purpose. Recommended Link [“The Mainstream Media Is Lying To You!”]( The media would have you believe that the worst of the supply chain issues are over. But the opposite is true… Behind the scenes, things are getting much, much worse. Bob Biesterfeld, CEO of one of the biggest logistics firms in the world, warns “the pressures on global supply chains have not eased, and we don’t expect them to any time soon.” This is going to impact every American’s life in a potentially major way… And I’m urging everyone I can to prepare now. See the #1 move to make before this problem gets any worse... [Click Here Now]( Sean Ring Editor, Rude Awakening Happy Tuesday! As the monthly asset class report is coming out this Friday, I’ll try to touch on other topics before then. Today, I’ll look at why the “professional” economists got this crisis - and every other damn crisis - so wrong. But first, a joke: Why did God create economists? To make weathermen look good. Taleb on Economists Next, let’s look at what Nassim Nicholas Taleb has said about economists. By the way, if you have spare time, you should read his books. I genuinely believe [Fooled By Randomness]( his first mainstream book, will be required reading 500 years from now. It’s that amazing. [The Black Swan]( is also excellent and many people’s favorite. That may be part of the reason why it’s not my favorite. If you’ve heard the term [Antifragile]( that, too, came from Taleb. [The Bed of Procrustes]( is a fun book of aphorisms. And finally, in [Skin in the Game]( Taleb writes, “Never trust anyone who doesn’t have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them.” And that, my friend, will give you a clue about how he feels about economists. I must thank Business Insider for compiling [this list of Taleb’s best insults to economists](. Here are my favorites: - An economist is a mixture of 1) a businessman without common sense, 2) a physicist without a brain, and 3) a speculator without balls. - Those with brains no balls become mathematicians, those with balls no brains join the mafia, and those w no balls no brains become economists. - To have a great day: 1) Smile at a stranger, 2) Surprise someone by saying something unexpectedly nice, 3) Give some genuine attention to an elderly, 4) Invite someone who doesn't have many friends for coffee, 5) Humiliate an economist, publicly, or create deep anxiety inside a Harvard professor. - A trader listened to the firm's "chief" economist's predictions about gold, then lost a bundle. The trader was asked to leave the firm. He then angrily asked his boss who was firing him: "Why do you fire me alone not the economist? He is too responsible for the loss." The Boss: "You idiot, we are not firing you for losing money; we are firing you for listening to the economist." - Friends, I wonder if someone has computed how much would be saved if we shut down economics and political science departments in universities. Those who need to research these subjects can do so on their private time. Now that we’ve had our chuckle, let’s look at the navel-gazing the economics profession is engaging in and why. Larry Summers Makes a Comeback ZeroHedge likes to post this picture as a reminder to those of us who once trusted government: That cover came out in February 1999. I hadn’t moved to London yet, had never even heard of Austrian Economics, and thought Alan Greenspan was a god. I just shook my head as I wrote that last sentence. Oh, the naivety. Of course, the market topped a year later and fell for the next three after that. Reputations were tarnished. Greenspan’s will never recover. And this magazine cover holds a place in infamy that rivals Businessweek’s “The Death of Equities.” However, one of the men on the Time cover has made a stunning comeback into the mainstream. Larry Summers, the portly chap over Greenspan’s left shoulder, correctly called the inflation we’re seeing now. I had been absentmindedly flicking around the boob tube when I stumbled onto Wall Street Week’s [interview with Summers]( a couple of weeks ago. He alleged the Fed “called an audible” with the 75 bps move and had “underestimated the gravity of the situation.” Summers said he thought stagflation was a possibility and the economy was overheating. He said he’d be surprised to see inflation come back down to 2.5% without inducing a recession. All this raised my eyebrows, as you rarely hear dissenting opinions from world-famous economists. But I agree with his views. And then yesterday, I flipped to WSJ.com to see Greg Ip writing about Summers. Recommended Link [Federal Ruling does WHAT?]( [Click here for more...]( The Federal Government just passed an obscure new ruling. It could change your life in ways you’ve never thought possible. And help some Americans make a small fortune in the process. [Click Here To See How]( Greg Ip Asks Why Ip is the Chief Economics Commentator for The Journal and has been a Fed watcher for decades. His article, “[On Inflation, Economics Has Some Explaining to Do]( is a good read if you want to know some of the ways professional (government-employed) economists get things so wrong. The Philips Curve is still in use? Really? The Philips Curve posits there’s an inverse relationship between inflation and unemployment. But during the 1970s, we’ve had high unemployment and high inflation. A model disproven 50 years ago still underpins many of the Fed’s models. And that leads nicely to the next risk: model risk. We treat models as sacrosanct. But there can be many errors in assumptions, coding, and computation. These models tell us a story. They try to remove the “human” element from the proceedings. The problem is you can’t remove the “human” from “human action.” And that, ultimately, is what economics is about. Not this silly mathurbation professional economists dazzle themselves with. The best bit of the piece was this (bolds mine): Mr. Summers is one of the few economists to have warned of inflation early in 2021 (and to have published several NBER papers on the subject). While he’s critical of the Fed’s models, his framework is similar: He thought President Biden’s $1.9 trillion stimulus would far exceed the output gap. He said this was a “back of the envelope” model that didn’t yield precise forecasts but, combined with history and judgment, “provided enough information to say overheating was an enormous risk.” Imagine that! An academic who uses logic, common sense, and experience to forecast? My god, he’s nearly a practitioner! Wrap Up This article isn’t meant to absolve Larry Summers for his myriad mistakes when he served in government. But it shows that even a dyed-in-the-wool academic economist can wake up and think for himself. It’s great to see. If only there were more! The bigger mystery is why anyone even pays attention to what the professional class of economists spouts. They’ve been wrong about everything - the pandemic, shutdown, stimulus - for the last few years. And it’s not like they had a stellar track record before that. My last quote from Ip’s article: Economists at both the Federal Reserve and the White House were blindsided. The European Central Bank recently reported that the accuracy of its inflation forecasts “declined significantly during the Covid-19 crisis.” Blindsided? I can’t believe they can’t believe how inaccurate they were. Until tomorrow. All the best, Sean Ring Editor, Rude Awakening [Whitelist Us]( | [Archive]( | [Privacy Policy]( | [Unsubscribe]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [unsubscribe](. Please read our [Privacy Statement.]( If you are you having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting us.]( © 2022 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. 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