Will Bernanke Save Us?

As a major in philosophy (minor in existentialism) and an investor with years of experience losing money in the markets, I personally doubt that we can ever predict economic outcomes based on theories such as aggregate demand and supply, efficient market theory, and monetarism. If solid Newtonian physics could be dis-proven by Einstein’s Theory Of Relativity, do we really think that we can scientifically make predictions about the psychology of markets and irrational human behavior?

The stock market provides a laboratory for testing theoretical hypothesis. With stock or options trades, you can test your economic theories with real money on the line. Surprisingly, the majority of economists never become millionaires. If they had a crystal ball predicting market behaviors, economists could earn annual rates of return of at least 150% to 350%. My own belief formulates that we don’t know anything regardless of how much data we analyze and regardless of how much economic theory we understand.

Nobel laureate economist Milton Friedman and Anna Jacobson Schwartz published A Monetary History of the United States, 1867 – 1960 and argued that increasing the money supply in 1932 would have saved us from the Great Depression. Monetarism under Paul Volcker worked in the early 1980s to curb inflation, but Friedman could not test his Great Depression theory until the Japanese stock market crash in 1989 and subsequent deflation.

In 1997, Nobel prize winning economist Paul Krugman recommended monetarist principals to the Japanese government and advised them to “print more money.” In the graph below, lets look at the effect of this policy on long-term interest rates in Japan.

From 1995 to 2010, interest rates in Japan remained below 1%. That’s 15 years of low interest rates! In the graph at zempower.com/archives/679, let’s analyze how these low interest rates affected nominal GDP growth in Japan.

Clearly, Paul Krugman and monetarism theory did not pull Japan out of it’s economic malaise. One more analysis. Low interest rates always cause real estate prices to rise, right? View the graph at zempower.com/archives/679 to find out.

The cliche that “real estate always goes up” proves to be a myth. Zero interest rates did not resuscitate the Japanese real estate market. As seen in the graph at zempower.com/archives/679, the only result of Krugman’s policy advise were unsustainable national deficits.

With national deficits at 200% of GDP, the Japanese government must cut spending or teeter-totter on the verge of bankruptcy. Monetary theory applied towards post-bubble deflation fails because banks do not increase lending even when interest rates remain at zero. In this scenario, banks cannot find credit worthy borrowers with the qualified balance sheets for a loan.

Have economists changed their theories since the Japanese experiment? No! After the mortgage crisis in 2008, Ben “helicopter” Bernanke favors the same quantitative easing policy that failed in Japan. The scientific method dictates eliminating a false theory when continual experiments prove your hypothesis to be false.

In another blog, I’ll explain why the efficient market theory and the equilibrium theory (those fun aggregate demand and supply curves) prove to be wrong. My alternative theory suggests that we cannot predict economic outcomes because people act and think irrationally. As an analogy, we can only aspire to become like weather forecasters with an uncanny ability to forecast snow in the winter, sun in the summer, and rain in Seattle.

By: Zempower

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The key to wealth is simply the ability to foresee and invest in asset bubbles in their early and middle stages and the discipline to sell your holdings during their late stages. If you’d like to get my updated blogs, please like my “Like” my page at www.facebook.com/zempower. If you need a no-nonsense private money lender for real estate or for a start-up business, please contact me at 206.832.9590.