An Epidemic of Blissful Ignorance

October 19, 2015

In economics, the majority is always wrong. So opined John Kenneth Galbraith. So too it is with stocks. Where one can usually make astute decisions betting against the herd.
Still, if one wishes to make money in the financial markets, it can be fatal to shrug off economics as pointless. For the decisions made by theoretical economists, legislators and bureaucrats largely determine the course of business activity, not to mention the direction of stocks.
Yet, most of us have come to accept economics as beyond our purview. Which is, individually and collectively, a fatal error.

What market observer has not seen the major indexes respond to news of the budget deficit, Fed policy, currency fluctuations, or trade legislation.
In fact, it is difficult to argue against the thesis that government wields the cudgel that can, and sometimes does, break the back of American business.
While economic policy often hinders as much it helps, astute investors can remain above the fray. Benefiting regardless of economic realities.
A huge facet to successful investing lay in the ability to anticipate fiscal, monetary and legislative policy. To determine the market's reaction to such policy. And to posit the impact on the business cycle.
Today's policy makers default towards Keynesian economic principles. Most of which purport that the government must play a role in directing Adam Smith's invisible hand. Even as the government has proven itself an inefficient capital allocator.
Personally, I prefer the conventional wisdom of thinkers like Ludwig von Mises, Adam Smith, Frederick Hayek, Henry Hazlit and Ayn Rand, among others. Those placing a higher premium on the value of doers, as opposed to theorists. Who value builders, as opposed to those who offer only ideas. Ideas are potential treasures. But they must be proven in the marketplace.
Today, these sensible economic intellects are not in vogue. While their resurgence may benefit the prospects of the nation, it does not mean that we can't profit from the policies at hand. From the early stages of government-induced financial bubbles. From pending inflation. And then exiting, before Smith's invisible hand reaches out to prick the bubble and re-establish the harsh link to reality.
What today's policy makers rarely discuss, as it is the wont of most Keynesians to ignore, is the idea of cause and effect. Perhaps never has there been a relationship that is more enduring, sustainable and largely ignored than that between cause and effect. Though the truths therein always and eventually reappear.
For instance, the more that is given, the more that is wanted. Conversely, the more that is removed, the more effort is required to restore. As Tocqueville wisely quipped, "When the public discovers they can vote themselves money from the public treasury, the [American] experiment will be over."
Washington's economic gurus fail to recognize that long-term prosperity cannot be created with a pen stroke. The laws of supply and demand do not exist to be treated like parlor tricks at a magic show.
Unfortunately, most policy makers are cowards, lacking the political gumption to deny constituents and special interest groups the prizes clamored for. They lack the willingness to explain that never, in the history of civilization, has something been gained for nothing.
Instead of the difficult truth, cowardly bureaucrats and policy makers create elaborate devices in an effort to cheat reality. They overspend. Ignore the inevitable consequences. Then pass along the blame as if the responsibility lay entirely elsewhere.
This, in the name of economic policy.
In developing his theories on economics, Keynes gave pseudo-scientific status to economic fallacies as aged as society itself. He rationalized government intervention into free markets. Government control of money and credit. Deficit spending and inflationary programs.
Yet, as opposed to seeing through these mistakes, politicians, academics and theorists recognized a chance to expand their largesse by inflating the purses to which it was attached. They created massive, complex systems, complicated measurements and tools of calibration. All of which intimidated the hell out of all onlookers. Those on the outside. Leaving the ineffective insiders hopelessly in control.
Ever found yourself intimidated by economics? Slightly agitated by the intricacies behind the dismal science? That is exactly where politicians hope you'll remain. Exactly why, for years, they've joined with members of academia in declaring that the inner workings of markets and the economy were far too difficult for the minds of common men.
Your blissful ignorance was the desired outcome. The state towards which they had worked methodically. Because the only way to consolidate economic endeavors within the nation's capital was to perpetuate a state of economic confusion everywhere else.
Today's complex economic issues, they contend, must be handled by a centralized cadre of forward thinkers. Intellects capable of weighing one issue against another. Striking the proper balance between what is "ideal" and what is "realistic."
These politicians and their academic support networks sell the idea that only the federal government and its countless array of task forces, lobbyists, staffers, committees and sub-committees, advisors, consultants, fund raisers, agencies and research staffs are capable of striking the right compromise. That which balances the needs of all the nation's opposing interests.
Only by inflating the supply of money and credit can we jump start the economy and encourage production. Only by confiscating obscenely excessive industry profits can we allow for deficit spending. Only by taxing producers might we be able to provide equal opportunities for the underprivileged. Only by forcing the hands of entrepreneurs to provide a higher minimum wage, better healthcare, social security contributions and unemployment insurance. By imposing trade barriers to support weak domestic industries while granting low-cost loans, subsidies and grants to developing countries so they might like us more. By subsidizing corn, wheat, milk, soybeans and all other byproducts of the American farmer, so that we can sell the surpluses at a loss to foreign nations.
Only by making these compromises can we strike the proper balance. Or so we are told. Until the only compromises reached are the very principles upon which the nation was built. That made it competitive. Opportunistic. Meritocratic. And better than all others.
Don't be fooled. There is nothing so complex about economics so as not to be understood. If you can balance a checkbook, you can understand economics.
Truth is, investors can make money in all environments. Good and bad. It is a hopeful nation that loses. And becomes a little less hopeful. Year after year.
When, two years ago, Washington D.C. displaced Silicon Valley as the nation's wealthiest metro area, did voters rise up and ask why?
When the nation's GDP, average household income and hopes for the future plummeted, even as the average income of our politicians, staffers and lobbyists hit all-time highs, did we rise up and ask how?
When politicians compromised the inheritance of our children and grandchildren by amassing mountains of debt in order to guarantee our short-term economic circumstances, did we ask when?
So long as we accept excuses and explanations at the federal level that would never fly in our own households and businesses we've no one to blame but ourselves.
In 1776, a collection of citizens gathered together and created the most august political experiment mankind had ever known. In so doing, they gave birth not just to the American dream, but to the dreams of men and women the world over.
239 years later, the American dream is alive and well for those employed in the nation's capital. The rest of us remain blissfully ignorant. Hoping that our elected officials can fix what ails us. Even as, from their vantage point, things have never been better.

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