April 2, 2013

The death of radical economics

The financial crisis of 2008 opened the doors to a crowd of financial doomsayers who would otherwise have been unnoticed. The collapse of Fannie and Freddie, housing and the banking system suddenly added credibility to every other tail risk on the planet. Black swans flourished as the world made demigods of people like Nassim Taleb, John Williams, Nouriel Roubini and Peter Schiff.

As the world was struck by a rare economic cyclone, it seemed imminent that some sort of hyperinflationary-hyperdeflationary plunge into anarchy was only a central banker's twitch away. This was/is our cold war and bankers had their fingers on 'the button'.

While predictions of doom are not totally unjustified, they failed to anticipate mankind's tenacity to muddle through the status quo.

Here are just a few economic outcomes that have 'disappointed' the radicalists:

- Oil is still being produced in significant amounts and the price is under $100/bbl

- Inflation is quite manageable

- We are not at war with Iran or North Korea

- Employment is rising

- Housing prices are rising

- America hasn't fallen to bond market vigilantes

- Europe hasn't broken apart

- Japan has yet to become all things bad that could happen in America

I am quite aware of the counter arguments to each of these points. In fact, I have personally argued the case for various doomsday scenarios over the years. I will probably continue to do so.

But there is the truth and then there are the facts. The market is filled with contradictions. It may be true that conventional oil production has peaked and we are substituting with lower quality, expensive substitutes. But the fact is that life remains relatively stable and oil prices have flatlined.

It is also true that America is running an unsustainable budget, given current and future liabilities. But the fact is that America is financing itself by issuing US Treasuries for next to nothing.

It is also true that many Americans are living in dire straights. But the fact is that things are generally improving for most people, whether they recognize it yet or not.

While it pays to pander to the pessimists (why do you think Zerohedge is so popular), it doesn't always pay to act on that pander. While Zerohedge may or may not have directly promoted a short position in risk assets and US Treasuries it certainly implied it. To my knowledge Zerohedge has uncovered a lot of truths. But the fact is markets have performed very well since the site was created. But perhaps that wasn't the purpose of the site.

It comes down to this: are you in this game for philosophical reasons or to make money. Because the two don't always mix. Maybe you are playing chess while the rest of the market plays basketball.

We know that the world is f@cked up. People are crooked, markets are rigged and the economy is filled with hot air. So what? Congratulations, if your goal is to be a critic. Often, I am one myself. Is the money-debt system sustainable over the long run? I don't think so. Will declining EROEI and other resource constraints become a drag on this credit-based system? Yes. But what many of the pessimists underestimate is humanity's ability to bullsh!t its way through the conundrums of its own making.

As things continue to improve, radical economics will increasingly be marginalized by the general population. This process will take a while to play out. However, it is this process that will eventually brew systemic risk as economic participants grow complacent. I still think there is an important place for radical economics because people need to understand the systemic risks our economy must eventually battle. But that doesn't justify ignoring the intermediate reality that the economy is improving. People need to understand the truth, but that shouldn't be at the expense of acknowledging the facts.