03.31.2009 0

The Fall of the Gubercentric Model

  • On: 04/08/2009 10:45:13
  • In: Economy
  • By Robert Romano

    “Aristotle or Aquinas, or anybody in his five wits, would of course agree that the conclusion [can] only be true if the premises [are] true.”—G.K. Chesterton.

    During the Renaissance, the geocentric, or Ptolemaic model of the solar system—which envisioned the Earth at the center and not the sun—was the law of nature. It had stood since ancient Greece, and was generally accepted, even to the point of absurdity.

    For the system to work, Ptolemy had to account for all sorts of anomalies. For example, retrograde motions of the planets—wherein they appear to periodically switch direction as they crossed the sky—that today we now know are only apparent motions because of the Earth’s rotation were routinely embraced as absolutes.

    But for Ptolemy, because the Earth stood stock-still at the center of the universe, these heavenly bodies simply had to be moving in this distorted manner. The Earth did not rotate nor revolve. This was accepted as scientific fact for centuries. All subsequent predictions of astrological phenomena were based upon it—until centuries later, when Copernicus changed the world and history with the heliocentric model.

    So it is today with Keynes’ gubercentric model, where wealth can literally be generated by the public treasury. Through the manipulation of interest rates, and through fiscal and monetary stimulus, government can “correct” the economy by increasing overall spending and reducing savings.

    By way of central government spending and interest rate reductions, Keynes argued, all harms from unemployment to recessions could be mitigated.

    So influential were Keynes’ theories, that they were adopted all over the world. In 1931, England left the gold standard and adopted his policies. In 1931, he interviewed members of the Federal Reserve, and was happy at their desire to promote economic expansion. In 1934, journalist Walter Lippman wrote Keynes a letter enthusing over the success of his policies in America, “I do not know whether you realize how great an effect that letter (viz. that in the New York Times) had, but I am told that it was chiefly responsible for the policy which the Treasury is now quietly but effectively pursuing of purchasing long-term government bonds with a view to making a strong bond market and to reducing the long-term rate of interest.” The Federal Reserve today sets the federal funds interest rate. Really, it’s a Keynesian debating society with voting power.

    In short, Keynes conquered the world. His gubercentric model became the way of viewing economic phenomena—no matter how absurd the prescription or destructive its consequences.

    And like Ptolemy’s ill-fated model of ages past, subsequent economic models, predictions and especially government policy decisions have all had to take the world Keynes made into account. Because not only was it a theory, it was a well-accepted practice.

    Since then, the monetary base has greatly expanded, the debt held by government has dramatically expanded, and the budget of the federal government has exploded. Since 1957, the public debt held by American taxpayers has increased every single year. Not once has it decreased.

    And the budget “surpluses” the government reports for 1960, 1969, 1998, 1999, 2000, and 2001? Those do not take into account the accumulating interest—even with the government manipulating the interest rates—that caused the debt year on end to increase in the aggregate.

    The shady numbers do not end there, though. Historians for years to come may have a hard time accessing any accurate data at all of this period.

    To say the least, they may want to gather their own.

    All economic indicators since the Depression era—many developed using Keynes’ models—have been modified over the years. Like Ptolemy’s retrograde “loops” of centuries’ past, the net effect is to obfuscate—the ill, real economic consequences of errant, Keynesian government policies. The rationale for these modifications has ranged from academic to economic to political. But without question, the impact of economic phenomena has increasingly been made to look “less bad” over the years.

    Take for example the manner in which Consumer Price Index inflation has been modified over the years: in 1983, the Bureau of Labor Statistics’ measurement was changed to exclude the cost of owning a house; in 1995, it was changed per the Boskin Commission’s recommendations to remove what the body viewed as “biases” inherent in prior indicators; in 2006 the Federal Reserve Board of Governors stop measuring M3 because the figure was no longer deemed relevant.

    The net result is that inflation as reported today bears little resemblance to inflation as it was reported in the rightly maligned Carter era, when inflation was in the double digits. But as reported by Joshua Holland in Dollars and Sense, under the older metrics, CPI inflation has actually averaged about 9.5 percent from 2001-2008, much higher than the 2.4 percent average reported.

    Other objections to today’s manufactured figures include the fact that food, energy and other commodities—deemed too volatile to accurately plot inflation trends—are excluded from “core” inflation numbers reported by the government, and thus the media. To settle all of these theoretical arguments is not the purpose of this piece, rather it is to consider the real-world implications of the manipulators’ contentions.

    What if the data was flawed? What would that mean, for the economy, for the government, for the markets, and for the American people?

    The trouble here is that government data carries with it a weight of authenticity that other data do not. If it were flawed, either somewhat or severely, the consequences would ripple economy-wide, wreaking havoc and causing distortions. Like bubbles.

    Economic analyses are based on that data. Financial decisions are made based on that data. Certainly, monetary policy judgments have been made based upon that data, as noted by Gjerstad and Smith in their Wall Street Journal piece describing how manipulation of the interest rates accommodated and perpetuated the housing bubble to critical levels.

    All of which affects—and harms—the American people, who just watched the value of their retirements wiped out because of that bubble, watched energy and other commodities soar last year to unaffordable levels, and watched the very solvency of the financial and credit systems tested. All as a direct result of monetary, fiscal, and other policies pursued by government.

    Americans were hurt badly in the process: with their investments, at the gas pump, and by the ability of their employers to hold on to them as employees, or to even stay in business.

    From a broader view, the relative and absolute value of the U.S. dollar as measured is most certainly affected in particular by inflation data. If inflation were reported higher than is currently stated, the dollar would naturally have to fall in tandem.

    And since currencies are measured relative to one another, and not absolutely, central banks would have to agree on the metrics in order to make any sense of the relative values of currencies.

    Therefore, collusion, or at least replication of the same metrics for reporting throughout the system would be necessary amongst central banks worldwide to obfuscate the flaws inherent in the system. In the least, the fact that the U.S. dollar is the world’s reserve currency in itself might explain why central banks the world over use the same metrics for measuring inflation and other monetary data.

    Certainly, through worldwide acceptance of said metrics and the theories that underpin them—much like the Ptolemaic model—critical flaws would be much harder to spot, because alternative systems for reporting are not being tested. Orthodoxy and tradition then become barriers to exploration, innovation, and reform.

    After the past year’s events, however, central banks may want to reevaluate that position as they also ponder whether they want even want the U.S. to be the world’s reserve currency—a nation in the midst of the greatest debt crisis in human history.

    Modifications to economic data as reported by the government are not contained to the CPI, unfortunately. Take for example the measure of unemployment: today, unemployment (U3) as reported by the government is 8.5 percent; but under older reporting methods, the actual unemployment figures ranges anywhere from 15.6 percent to 19.8 percent depending on the method.

    As noted by Dr. Martin Weiss, unemployment during the Great Depression reached 25 percent. But if current methods for reporting were used then, it would have appeared to be far less. So, it would be grossly inaccurate for anybody to suggest that today’s unemployment is not nearly as bad as the Great Depression, when today’s reporting method in no way resembles reporting back then.

    Now, due to the—very likely deliberate—distortion the manipulators have built into the system, comparing today’s data to that of years past is an apples-to-oranges contrast. For example, comparing today’s inflation to Carter-era hyperinflation. The public may believe that so long as inflation is single-digit, that inflation is not a problem. Meanwhile, an apples-to-apples comparison would show something far worse than is reported.

    The numbers therefore also have a propaganda value, and are often used politically to help or damage presidential administrations. And they do indeed have an impact. If inflation and unemployment are “low,” if the budget is “balanced”, or if the Gross Domestic Product “increases”, the incumbents have an advantage. In the very least, there is an incentive for the numbers to be skewed.

    And it makes it all the harder to spot flaws in the Keynesian, gubercentric model, which permits no alternative dictum.

    But now, with unemployment spiraling upward and the inflation bug almost ready to bite again, the fatal cracks in the actual economy will soon be so apparent that no amount of hiding the numbers by bureaucrats will prevent the stark realization that a catastrophe has occurred. And no amount of the orthodox Keynesian punditry declaring the patriotism of government spending, investing, paying taxes, and “talking up” the economy will be enough to convince the people that the sun revolves around the Earth—or that the government creates any wealth at all.

    Robert Romano is the Senior Editor of ALG News Bureau.


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