Why You Should Never Trust an Economist

Congratulations, New Zealand! You’re the number one country in the world for exemplifying a business-friendly environment.

The World Bank regularly issues a report on how countries fare as a platform for doing business. In the most recent report, issued 31 October, New Zealand stole the gold medal.

Now, what does this mean exactly?

The World Bank focuses on the following factors:

  • Starting a business
  • Registering property
  • Getting credit
  • Trading across borders
  • Taxes
  • Contracts

And it basically looks at those factors and measures the time and cost that it takes to achieve them.

It’s about cutting out the red tape and guaranteeing that processes are quick and easy.

Typically, this means getting rid of the human element. ‘E-government’ is a strategy gaining popularity…and one that is well-rewarded by the World Bank’s ranking system.

It’s about automation…and heaven knows that the government is full of automatable jobs.

Automate me

As an economist myself, I’ll be quick to volunteer my profession as the first to go.

Most of us work in the upper echelons of government, academia, or big corporate…and we have developed a certain job security by convincing folks that economics is a science.

It isn’t.

Sure, we can pile on the jargon and make ourselves look smart, but in the end, nobody knows how it all works.

If we did, there wouldn’t be depressions or recessions. There would be full unemployment, high incomes, and stable prices. There’d be no bubbles, no scarcity, nothing to kill or die for…[openx slug=inpost]

You might say I’m a dreamer…

And you’d be right.

And that’s because the pseudo-science of economics is closer to astrology than astronomy. But with the heavy cloak of our high-and-mighty vocabulary to protect us, it sure is easy to confuse economics with a hard science.

The best example of this is Alan Greenspan. The guy was heavily responsible for the Great Financial Crisis of 2007 but is still considered one of the top economists of all time. Why? Because he had the gift of the gab. He took economic jargon and ramped it up a notch by inventing his very own ‘Fedspeak’.

Alan Blinder described it as ‘a turgid dialect of English used by Federal Reserve Board chairmen in making wordy, vague, and ambiguous statements.

Why do central bankers and economists talk like that? Because it’s what makes people think they’re saying and doing something legitimate.

When I hear about economists gathering together in places like Davos, Switzerland or Jackson Hole, Wyoming…I wonder, what are they doing? Squeezing in a quick black diamond run between the palm reader presentation and tarot card demonstration? Taking turns on the Zoltar Machine?

What they’re not doing is making accurate predictions about the market.

In 2006, just months before the worst economic downturn in generations, Fed Chairman Ben Bernanke was giving thumbs up across the board. At the annual meeting in Jackson Hole, he said (emphasis mine):

Economic growth could rebound more vigorously than now expected. The solid rate of job growth, the decline in the unemployment rate, and the healthy pace of capital investment could be signals that underlying economic fundamentals are stronger than generally recognized. Moreover, to date there is little evidence that the weakness in housing markets is spilling over more broadly to consumer spending or aggregate employment.

Sure enough, just months later, weaknesses in the housing market spilled over to consumer spending and aggregate employment…and just about every other sector too…causing a worldwide crash.

Future of New Zealand

New Zealand’s economy is measured by heaps of factors like unemployment, interest rates and inflation. Certain cause-and-effect concepts can help us understand what they mean.

One is that lowering the interest rate causes more borrowing and therefore more economic prosperity. That’s undeniable. And New Zealanders have been enjoying that scenario since 2009.

But at the same time, another rule is that everyone eventually pays the piper. Building on debt today means paying it off tomorrow. And typically, that reality hits when the authorities tighten up interest rates. New Zealand’s been overdue a rate bump for, in my opinion, at least six years. The piper’s waiting…

Another rule is that markets work in cycles. Valleys follow peaks and vice versa. In New Zealand, we’ve seen the housing market hit peak after peak after peak for 30 years. Eventually, there’s going to be a valley…and my guess is that it looks more like a cliff.

But like I said, this isn’t an exact science. It’s not even a science at all. We’re pushed along by what Adam Smith termed the ‘Invisible Hand’ — a force of nature that orients us in the world of wealth.

And it can be unpredictable.

The best you can do is take a high-level look around you. If you’re seeing a bunch of red flags, it might be time to bunker down.

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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