Do you ever find yourself pulled back through history and imagining what life was like for a particular group back in the day? Like the Mayans, or the Romans, or the French aristocracy? Or maybe you looked at the Super Blood Wolf Moon eclipse this January and wondered how many past regimes had been overthrown and leaders axed (literally) because such things were perceived as having lost the favor of the gods? Or maybe not and we’re just weird like that.
In any case, this is an April newsletter, so dust off that aluminum foil and let’s pull back the curtain on the collective solipsism behind the not-so-invisible hand that guides our markets. Also, put 1984 back on top of your summer reading list. Ready? Let’s go.
A superstition is a belief that a seemingly innocuous action holds some sort of meaning or control over much larger, uncontrollable cosmic forces. Mirror breaking, walking under ladders, crossing paths with black cats, stepping on cracks - these are all pretty common examples. Athletes have their own superstitions, though they tend to be looked on more favorably and referred to as “routines” or “rituals”: wearing red on Sunday (Tiger Woods), eating two chocolate chip cookies before games (Brian Urlacher), not changing clothes (many people). On the other side of the spectrum, you’ve got the more maligned tea leaf interpreting, palm reading, tarot, and crystal ball gazing. And from the annals of history, apparently spitting on yourself stopped you from “catching” epilepsy, the ashes of a redhead on your field guaranteed a good harvest, and you’d be victorious in battle if your chicken ate cake.
In essence, superstitions are a kind of magical thinking that may occur on an individual level or on a much broader societal level. In fact, pretty much every early society had some form of this magical thinking as a foundational part of their culture as a means to both explain and control the larger forces of nature around them. Allow us a little leeway in letting such a broad assertion include: the presence of magicians in biblical Egyptian courts, the offering of sacrifices to various gods for particular purposes across pretty much all cultures (you wouldn’t find Achilles in the Temple of Dionysius before battle, for example...unless Brad Pitt’s portrayal was historically accurate), Native American rain dances, the witches of Shakespeare’s medieval Scotland, the Oracle of Delphi, and shamans/sages/seers in general.
In the abstract, a select group within society is responsible for performing/saying/doing the right ritual/spell/invocation to get the desired result. Such a spell is written in a language that you can’t understand if you’re not part of the select priestly group, which gives them an automatic sense of authority. More importantly, however, the rest of society believes in the power of the acts performed by the priestly group to actually deliver that result.
Superstition tends to be associated with knowledge and education, or rather the lack thereof. We now know about and can even model weather patterns, eclipses, soil nutrient levels, diseases, etc. without needing to rely on dancing, human sacrifice, or dearly departed gingers (sacrificed or other). This tends to make one look back on these previous societies as somewhat “primitive” - the idea that this group magical thinking is a consequence of lack of knowledge and that we, as a result of the inexorable progress of humanity through time, have transcended the need for such lowly superstitious beliefs.
Ha. Hahaha. Hahahahaha. More on that later.
This magical societal groupthink has been so prevalent throughout history that there is a well-documented sequence of events in such societies as they begin to decline. And it goes like this:
Usually, there has been some external forcing that makes the spell no longer effective. By “external forcing”, we mean shifting weather patterns, climate change, natural disaster, elephant invasion across the Alps...something outside your control that reveals the simple fact that your spell does not, in fact, work to control those things like you thought it did. When the spell doesn’t work, the immediate response is to do it again, but more and better. More chanting, perhaps, or more vigorous dancing, or purer ingredients. If that still doesn’t work, then you have to change it a little bit. Left foot instead of right foot. Counterclockwise instead of clockwise. Female redheads instead of just any old ginger. When that still doesn’t work, the rest of society quickly loses their belief in the power of your spells, and you’re in trouble. You are replaced by a populist-led new regime that brings new spells for the people to believe in, and the cycle starts all over again.
And there you go. You can find endless examples of this cycle throughout history. In fact, if you have a lot of time on your hands and enjoy non-fiction, add The Golden Bough to your summer reading list as well.
But back to the point about knowledge and education replacing magical thinking and superstition in our modern society. Where were we? Oh yes:
Consider our present-day society in the context of the above framework, if you will. We’ll leave to the side all of the obvious political analogies and instead focus our attention squarely on the Federal Reserve.
The Fed uses spells. Here’s one:
We couldn’t find a straight black-and-white version of this, so presumably the colors are part of the spell as well…
What’s that one, you ask? That’s called the Gaussian Copula. That’s the spell that let subprime mortgages get packaged into AAA-rated securities. Oops. Though technically, that one’s not on the Fed but rather on Wall Street in general.
Here’s another one:
What’s that one, we hear you asking again? That’s called the Taylor Rule, and this one is squarely on the Fed. It’s how the Fed uses interest rates to control inflation. Basically, it says that if interest rates are low, you print money and interest rates go up. Oops.
So the Fed uses spells, written in a language that nobody really understands unless you’re part of their chosen group. The hole themselves up in marble buildings located in major cities across the country, meet 8 times a year, and then with appropriate pomp and circumstance share their wisdom from on high with the masses at quarterly press conferences.
For decades now, the hard sciences have recognized that natural systems are complex and virtually impossible to model, let alone control. It’s why hurricanes have a probability cone around their path. It’s also why biologists understand that ecosystem-wide impacts are more than a simple cause and effect lever you can pull. The Fed, however, is not nearly as modest. They still labor under the delusion that they can control the inexorable forces of business cycles and human nature. So what happens when their spell doesn’t work? Well, let’s recap the timeline:
2008: Fed spells call for money printing. They called it “Quantitative Easing” (QE) and printed about $600 billion. It didn’t really work, so…
2009: More money printing! The QE program was extended by another $750 billion or so. That still didn’t really work, so…
2010: More, slightly different QE! Or “QE2” as it was called, to the tune of about another $1.2 trillion with a “t”. That still didn’t really work, so…
2011: More, slightly different different QE, called “Operation Twist”. That still didn’t really work, so…
2012-2014: Back to the original QE plan, just on an ongoing monthly basis, for another $900 billion or so.
...when the spell doesn’t work, the immediate response is to do it again, but more and better. More chanting, perhaps, or more vigorous dancing, or purer ingredients...If that still doesn’t work, then you have to change it a little bit…
Maybe the inflation target will become 4% instead of 2% inflation. Or maybe inflation isn’t the right magic word anymore and instead it will be “nominal GDP growth”. There will be tweak after tweak as the Fed tries to pull its little lever and control the inexorable, uncontrollable force of business cycles. At the moment, there’s a lot of talk about something called the “natural rate of interest”. The theory goes that QE didn’t work because there wasn’t enough of it. Yes, rates were at 0% for 10 years, but the “natural rate of interest” was negative and rates need to be below the “natural rate of interest” to be stimulative.
Eureka! That’s it! Financial conditions were just too tight with a decade of 0% interest and $3 trillion of money printing! (Also, “natural rate of interest” is in quotes because while it is a theoretical entity, it is impossible to ever determine or measure in the real word. But it sounds good, right?). They are quite literally making this up as they go along.
...when that still doesn’t work, the rest of society quickly loses their belief in the power of your spells, and you’re in trouble...
How do you try and hold on to credibility? By getting even more abstract (see “natural rate of interest”). By justifying your policies in light of social flashpoints (the European Central Bank released a study earlier this year “finding” that their quantitative easing policies actually lessened inequality). By promising stronger spells in the future (the San Fran Fed released a paper earlier this year “showing” that negative rates would have led to a faster economic recovery). The tax-cut and supply-side Chicagoans (remember your history of economic theory?) have had a good run of it for the last 40 years, but their spells aren’t working anymore, and their regime is starting to crumble. Think it’s just coincidence that this is happening at the same time Modern Monetary Theory is gaining prominence?
...you are replaced by a populist-led new regime that brings new spells for the people to believe in, and the cycle starts all over again…
Call us very superstitious, but the writing’s on the wall.
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