The World Is So Much More Complicated Than You Think

One of the great tragedies of analyzing the economy or the stock market is that it's so easy to oversimplify hugely complex things into simple one-liners. For example:

Stocks are overvalued.

Austrian economists got it all right (or wrong).

Keynesian economics doesn't (or does) work.

The government created the housing bubble.

The stimulus did (or didn't) work.

Wall Street is immoral.

"Buy and hold" is dead.

The Fed's money-printing will cause hyperinflation.

And so on.

For each topic -- and for so many other topics -- both sides of the debate can show their evidence and make their case as persuasive as the other. The truth, which usually comes down to the phrase "We just don't know, and it's really complicated," doesn't sit well with economists who spent a decade in school and have a Ph.D. to justify.

Last month I interviewed Hoover Institution economist Russ Roberts. In his opening remarks, he tells a great story about how complex the economy is and how dangerous it can be to have an unshakable view one way or the other. Have a look:


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  • Report this Comment On March 15, 2013, at 9:30 PM, Thaeger wrote:

    The only simple truth in life is that there are no simple truths in life, and anyone who claims otherwise is usually trying to sell you something?

  • Report this Comment On March 15, 2013, at 11:36 PM, SkepikI wrote:

    One of the great tragedies of MF is that GREAT M. Housel articles are inevitably followed by pitiful ones.

  • Report this Comment On March 16, 2013, at 12:43 PM, Sotograndeman wrote:

    It's hilarious, not to mention insulting, to have someone from TMF tell us that "the world is so much more complicated than you think".

    It's certainly more complex than THEY think, based on the voluminous trash they push out, but most investors with a pulse are in no doubt about the complexity of the world and the resultant risk.

    As for Roberts, the words of Peter Lynch come to mind: "If all the economists in the world were laid end to end, it wouldn't be a bad thing".

  • Report this Comment On March 16, 2013, at 1:48 PM, tomd728 wrote:

    Well said my brothers !

    Often times I feel the contributors are under pressure to produce something...anything for that matter.

    A long time writer/contributor to MF took the time to analyze the inventory levels at JAH. Nice job but who cares as JAH knows their business and executes better than any enterprise in that space...

    Let them (JAH) do their job and please find something to enlighten me.


  • Report this Comment On March 17, 2013, at 11:04 PM, djdrdave wrote:

    Whenever I see the words Hoover institute, I don't give a damn! Pun intended...

  • Report this Comment On April 09, 2013, at 6:13 PM, smokedsalmoned wrote:

    Cyprus. Yet another failure of Keynesian economics. Government spending and printing money is not the answer folks.

  • Report this Comment On April 09, 2013, at 6:20 PM, smokedsalmoned wrote:

    --The Greek Debt deal screwed over bond holders by stealing half they were owed, it also screwed over the banks giving the Greeks a sweetheart deal to try and resolve their crisis.

    --All involved thought that finally Greek was going to man up and take the needed austerity measures to get its house in order.

    --Now the Greek leader is playing politics and risking the deal.

    --Meanwhile Italy, Spain, Ireland and possibly even France are eyeing the deal with their own financial house of cards in mind and are learning that crying, whining and moaning sweetens the pot to help them clean up their own mess and they are queuing up to start their own kabuki show.

    --Markets rightly are taking note that soft headed and soft hearted bureaucrats are not fixing problems or punishing bad actors but are encouraging irresponsiblity and are growing worried.

  • Report this Comment On April 09, 2013, at 6:20 PM, smokedsalmoned wrote:

    --The Greek Debt deal screwed over bond holders by stealing half they were owed, it also screwed over the banks giving the Greeks a sweetheart deal to try and resolve their crisis.

    --All involved thought that finally Greek was going to man up and take the needed austerity measures to get its house in order.

    --Now the Greek leader is playing politics and risking the deal.

    --Meanwhile Italy, Spain, Ireland and possibly even France are eyeing the deal with their own financial house of cards in mind and are learning that crying, whining and moaning sweetens the pot to help them clean up their own mess and they are queuing up to start their own kabuki show.

    --Markets rightly are taking note that soft headed and soft hearted bureaucrats are not fixing problems or punishing bad actors but are encouraging irresponsiblity and are growing worried.

  • Report this Comment On April 09, 2013, at 6:21 PM, smokedsalmoned wrote:

    Greek crisis more than just politics – (Article On What Happens When Governments Spends A Nation Into Bankruptcy)


    A homeless man sleeps on a sidewalk in Athens on Sunday. Homelessness has risen by 25 percent during the financial crisis. (Kostas Tsironis / Associated Press)

    Athens, Greece — Like many Greeks left unemployed by their country's economic tailspin, Dimitris Spachos finds it easier to talk about his nation's problems than his own.

    Enormous debt accumulated over decades sent the country into a recession so deep it kills 200 businesses and 900 jobs every day. Elections this month failed to produce a government, and Greeks will vote again in June. Meanwhile, life for most Greeks continues to get worse.

    "Every day I see more people sleeping rough on the street," said Spachos, 72. "They can't even wash their clothes or themselves. ... It worries me."

    Here is a look at some of Greece's problems as it struggles to pay its debts:



    Over the past three years unemployment has roughly doubled, and Greece has lost more than 10 percent of its output.

    Nearly 320,000 people lost their jobs in the 12-month period ending in February, pushing the unemployment rate to 22 percent.


    Business woes

    Some 80,000 businesses were shuttered last year, and 136,000 more are expected to fail in 2012, according to estimates from the Athens Chamber of Commerce.



    The Public Order Ministry has reported an increase in nearly all categories of crime between 2010 and 2011, with murder up 5 percent and armed robberies in occupied homes up 110 percent.



    Homelessness, the most visible sign of Greece's financial despair, has risen by around 25 percent, according to estimates by a state-funded relief agency.

    Greece's Center for Disease Control and Prevention reported 954 new HIV infections in 2011, a 57 percent increase from the previous year.

    It attributes most of the rise to drug use.


    By Derek Gatopoulos May 21, 2012 at 1:00 am

    From The Detroit News:


    If your government is spending money like crazy, rapidly increasing your national debt, then someday expect these results for yourself and your nation. Just remember that Americas national debt has gone from11 trillion to 16 trillion in just the first 4 years that Obama has been in Office! Mayhem is sure to follow

  • Report this Comment On April 09, 2013, at 6:21 PM, smokedsalmoned wrote:

    Why the Obama tax hikes have only just begun

    When an economy is booming and jobs are plentiful, a “do no harm” approach to public policy will suffice. If GDP were expanding at a 4% annual rate, the unemployment rate were at 5%, and the national debt were low, then the fiscal cliff deal might be tolerable rather than terrible. While it won’t create any jobs or add to growth — just the opposite in fact — and it will only cut the national debt by a rounding-error amount, passage does avoid an across-the-board income tax hike and probable recession.

    So that’s something. But good enough? Not really. Avoiding major unforced errors is necessary but insufficient when you’re way behind in the game.

    But we’re not even doing that. Total taxes are going up some $220 billion this year, including both the Obama income tax hikes and the Obamacare tax hikes. Even worse, the income tax hikes raise the burden on working, saving, and investing. They make our mess of a tax code even more damaging to growth than what it was before.

    Nor is Obama done pushing higher taxes. As he said on New Year’s Eve, concerning the outstanding issues of the sequester and debt ceiling:

    “”I want to make clear that any agreement we have to deal with these automatic spending cuts that are being threatened for next month, those also have to be balanced, because, remember, my principle always has been let’s do things in a balanced, responsible way. And that means the revenues have to be part of the equation in turning off the sequester and eliminating these automatic spending cuts, as well as spending cuts. Now, the same is true for any future deficit agreement. Obviously we’re going to have to do more to reduce our debt and our deficit. I’m willing to do more, but it’s going to have to be balanced. We’re going to have do it in a balanced responsible way.””

    How much more “balance” does Obama want?

    1. Well, the fiscal cliff deal is a $620 billion tax hike, according to the Congressional Budget Office. Obama’s original offer to House Speaker John Boehner called for $1.6 trillion in tax hikes, including a) $960 billion in higher tax rates and higher taxes on investment income along with b) $600 billion in additional taxes, such as limiting tax breaks for wealthier Americans.

    2. In a November policy memo, White House economists thought a tax hike of around $500 billion was doable via broadening the tax base.

    3. Also recall that the president’s 2013 budget called for a $300 billion corporate tax hike.

    So adding it all up, it would seem the president’s second term goal is for roughly $2 trillion in new taxes. We’re only one-third of the way there.

    But what leverage will Obama have to make good on his tax-hike threats? As The Wall Street Journal editorial page notes today, “The President has had unusual leverage over Republicans because he just won re-election and because taxes were going to go up even if they did nothing.”

    One potential Obama bargaining chip is the sequester, particularly the $500 billion in defense cuts that many GOPers loathe. So perhaps Obama can offer to turn off the defense cuts in exchange for $500 billion from limiting tax breaks for the rich. And then maybe another $300 billion in corporate tax hikes for agreeing to change how Social Security benefits are calculated. Many scenarios are possible. What’s for sure is that Obama desires vastly higher taxes to pay for his expanded welfare state. Desires and needs them. And it’s now Democrat economic theology that tax rates could return to pre-Reagan levels without hurting growth.

    Tax hikes? Obama is only just getting started.

    James Pethokoukis | January 2, 2013, 12:23 pm

  • Report this Comment On April 09, 2013, at 6:21 PM, smokedsalmoned wrote:

    Keynesian Economics – It Failed Every Time It Was Tried. Why Is Obama Embracing It?


    Will someone please tell Barack Obama & others that Keynesian economics is dead. It failed in England and was disproved in America under FDR when after 5 years of such nonsense, we went into a double dip depression in 1938.


    Keynesian economics is dead and sadly there are still Professors along with our President who still hold dear to its proven wrong theories. One Professor recently opined that "This trend would be much more pronounced if not for the tens of billions of dollars in stimulus funds given to states to patch up budgets." You are a poor economics professor and obviously do not subscribe to the free market system or the laffer curve.


    Of course those know long since laid Keynes to rest know that if Obama and the Democrats had not spent over 5 trillion in deficits, including a massive bloated pro union Stimulus Plan, as well as put forth massive increased regulations including the Obamacare program, which led every business person in america to see a speeding train of increased costs coming at them at the end of the tunnel & to thus start cost cutting and setting asside money for that inevitable increased cost we would have most likely long since been out of this recession.


    ( Keynes Was Influenced By Communism. Keynes visited the Soviet Union in 1926. He was interested in the economic measures being taken by the communist regime and when he returned to England he wrote The end Of Laissez-Faire. After the onset on the Great Depression in 1929, Keynes began to address the problems of unemployment. In a series of articles, The Means to Prosperity, written in The Times, Keynes argued that the government should "spend its way out of the depression ".)

  • Report this Comment On April 09, 2013, at 6:23 PM, smokedsalmoned wrote:

    Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy. Winston Churchill

  • Report this Comment On April 09, 2013, at 6:23 PM, smokedsalmoned wrote:

    Liberalism, Socialism & Fascism – A Brief Ugly History.


            American liberals are descendants of the early Progressives, who do share deep intellectual roots with fascists.  Both fascists and liberals seek to use the State to solve the problems of  our modern society.   Fascist party programs contained active social welfare policies which were implemented through a corporate State much as liberals and socialists  aim to. 


            The totalitarian urge, the philosophy of state control of decisions taking priority over individual freedoms, is the chief unifying driver  behind these movements.    The living heritage of such Statism is found today in what  has come to be known as the "liberal" politics of the modern progressive movement.


            In the US , fascism via liberal policy  thankfully took a different form  than  totalitarianism.  Nevertheless, whether it is the suffocating embrace of an "It Takes a Village" nanny state or, to a lesser  extent , the big-government, "compassionate conservatism" of the modern politician, fascism in the U.S. is well-intentioned, "smiley face" fascism, with the overriding command to look first to the State and lastly to the individual.


             A rose by any other name is the liberal agenda  as well as the potential  fascist State.  Hitler at first built a progressive welfare state,  so be forewarned  and carefully guard against the wiles of liberal doctrine.

  • Report this Comment On April 09, 2013, at 6:26 PM, smokedsalmoned wrote:

    The "1st" Stimulus Failed Too…..I’m talking about FDR’s Stimulus Plan.

        After the stock market crash in 1929 (brought on by overvalued stock prices as well as real estate) the government reacted by raising taxes to balance the federal budget and raising protectionist tariffs to protect US jobs from foreign competitors. The end result of these twin actions was that the US economy shrunk by 2/3's and the rest of the worlds economy suffered as well.


         When FDR then increased government spending to "create" or "save" jobs along with even greater tax increases than Hoover, aided Union creation, and implemented wage controls to prevent wages from falling, the economy got worse and hit bottom in 1938, five years into the FDR administration.  It only began to pull out as Europe went to war in 1939.


         Since being elected, Obama has pushed an extremist spending agenda to "create" or "save" jobs that will push national debt up 50% in 4 years. He is calling for higher taxes to pay for it and our large national debt will devalue our dollar at the same time. Many leading democrats are also calling for buy American clauses in government spending as well as protectionist tariffs. 


          If you forget history you are doomed to repeat it and apparently Obama and the Democrats do not recall their own history.

  • Report this Comment On April 09, 2013, at 6:27 PM, smokedsalmoned wrote:

    Is Health Reform Sustainable?

    In his 3/10/10 column David Brooks pointed out that the Democrats stuffed the health legislation with gimmicks and dodges designed to get a good score from the Congressional Budget Office but that of course won't honestly control runaway spending. Here is how they gamed the system, themselves, the taxpayers and the C.B.O.:

    • There is the doc fix dodge. The legislation pretends that Congress is about to cut Medicare reimbursements 21 percent. Everyone knows that will never happen, so over the next decade actual spending will be $300 billion higher than paper projections.

    • There is the long-term care dodge. The bill creates a $72 billion trust fund to pay for a new long-term care program. The sponsors count that money as cost-saving, even though it will eventually be paid back out when the program comes on line.

    • There is the subsidy dodge. Workers making $60,000 and in the health exchanges would receive $4,500 more in subsidies in 2016 than workers making $60,000 and not in the exchanges. There is no way future Congresses will allow that disparity to persist. Soon, everybody will get the subsidy.

    • There is the excise tax dodge. The primary cost-control mechanism and long-term revenue source for the program is the tax on high-cost plans. But Democrats aren't willing to levy this tax for eight years. The fiscal sustainability of the bill rests on the naive hope that a future Congress will accept a trillion-dollar tax when the current Congress wouldn't accept an increase of a few billion.

    • There is the 10-6 dodge. One of the reasons the bill appears deficit-neutral in the first decade is that it begins collecting revenue right away but doesn't have to pay for most benefits until 2014. That's 10 years of revenues to pay for 6 years of benefits, something unlikely to happen again unless the country agrees to go without health care for four years every decade.

    • There is the Social Security dodge. The bill uses $52 billion in higher Social Security taxes to pay for health care expansion. But if Social Security taxes pay for health care, what pays for Social Security?

    • There is the pilot program dodge. Admirably, the bill includes pilot programs designed to help find ways to control costs. But it's not clear that the bill includes mechanisms to actually implement the results. This is what happened to undermine previous pilot program efforts.

    The Democrats have built yet another unsustainable and likely unkillable program that will damage Americas fiscal and economic future and every taxpayer should know it and be mad as hell about it.

  • Report this Comment On April 09, 2013, at 6:29 PM, smokedsalmoned wrote:

    'The Lady's not for turning' – Margaret Thatcher On Socialism And Deficit Spending.

    Margaret Thatcher, dead Monday at the age of 87, was Britain's greatest post-war prime minister, and one of the great leaders of the world. She pulled her nation back from socialism, had the courage to stand on her convictions, and placed principle ahead of popularity. These excerpts from a 1980 speech to the Conservative Party help explain why she earned the nickname "The Iron Lady" and are particularly applicable to America today.

    If spending money like water was the answer to our country's problems, we would have no problems now. If ever a nation has spent, spent, spent and spent again, ours has. Today that dream is over. All of that money has got us nowhere, but it still has to come from somewhere. Those who urge us to relax the squeeze, to spend yet more money indiscriminately in the belief that it will help the unemployed and the small businessman, are not being kind or compassionate or caring. They are not the friends of the unemployed or the small business. They are asking us to do again the very thing that caused the problems in the first place. We have made this point repeatedly.

    I am accused of lecturing or preaching about this. I suppose it is a critic's way of saying, "Well, we know it is true, but we have to carp at something." I do not care about that. But I do care about the future of free enterprise, the jobs and exports it provides and the independence it brings to our people. Independence? Yes, but let us be clear what we mean by that. Independence does not mean contracting out of all relationships with others.

    A nation can be free but it will not stay free for long if it has no friends and no alliances. Above all, it will not stay free if it cannot pay its own way in the world. By the same token, an individual needs to be part of a community and to feel that he is part of it. There is more to this than the chance to earn a living for himself and his family, essential though that is.

    Of course, our vision and our aims go far beyond the complex arguments of economics, but unless we get the economy right we shall deny our people the opportunity to share that vision and to see beyond the narrow horizons of economic necessity. Without a healthy economy we cannot have a healthy society. Without a healthy society the economy will not stay healthy for long.

    But it is not the state that creates a healthy society. When the state grows too powerful, people feel that they count for less and less. The state drains society, not only of its wealth but of initiative, of energy, the will to improve and innovate as well as to preserve what is best. Our aim is to let people feel that they count for more and more. If we cannot trust the deepest instincts of our people, we should not be in politics at all. Some aspects of our present society really do offend those instincts. …

    If our people feel that they are part of a great nation and they are prepared to will the means to keep it great, a great nation we shall be, and shall remain. …

    To those waiting with bated breath for that favorite media catchphrase, the "U" turn, I have only one thing to say.

    "You turn if you want to. The lady's not for turning."

    From The Detroit News:

    Someone should read this speech to Obama, Reid and Pelosi every night before bed.

  • Report this Comment On April 09, 2013, at 6:30 PM, smokedsalmoned wrote:

    Is an artificial economy sustainable?

    U.S. stock prices have just reached record highs, erasing the losses since the previous 2007 peak. But can the rally be sustained on the fundamentals of the economy without government support?

    Since the Great Depression, recessions have always been followed by strong recoveries within two years of market bottoms

    Now, more than four years since the market bottom in March 2009, the U.S. economy as measured by the labor force participation rate, which captures the percentage of working age people in the labor force, has just dropped to a new 30-year low at 63.5 percent. GDP growth from the market bottom has averaged 1.94 percent annually, the worst post-recession rebound in the last 70 years

    Ironically, this subpar economic performance has been achieved despite record stimulus by Washington. During the last four years, deficit spending has been averaging $1.24 trillion annually, while the Fed has been pedal-to-the-metal in injecting trillions of dollars into the banking system — the most aggressive monetary policy ever

    In spite of this assertive Keynesian approach, the economy has grown less than 8 percent in four years, while the national debt has grown more than 50 percent. The risk adjusted benefits just don't add up. The Fed has become the enabler of government profligacy with low interest rates, which has created the largest bubble in history

    Instead of acknowledging the unsustainability of the present course, many in D.C. obfuscate what's going on with deflection away from the risks of record deficits and debt

    Prior to the 08 crisis it was universally unacceptable for the Fed to monetize government debt, because it would lead to inflation. Similarly, it was unthinkable for government deficit spending to exceed 5 percent of GDP, let alone reach a trillion dollars in a year

    Now some in Washington say there's no problem because the deficit is falling, notwithstanding the likelihood of a fifth consecutive year of near-trillion dollar deficits. While the Federal Reserve's balance sheet has grown to $3.2 trillion, few call it the debt monetization that it is. Rather it's referred to as Quantitative Easing

    The purpose of QE, we are told, is to lower interest rates and stimulate the economy. But an equally plausible purpose of QE is to keep the cost of the government's deficit spending artificially low, hiding the real cost of government profligacy

    The U.S. economy is now rigged and no longer operating as a free market system

    When the most important price factor, the cost of credit, has been artificially depressed by the central planners at the Federal Reserve for more than 4 years, distortions and abnormalities impede the private sector investment and job creation that drive a normal recovery

    Socialism fails because its central planning interferes with incentives, responsibility and the pricing system. Prices are essential carriers of information that facilitate the efficient allocation of resources, including risk capital for new technologies and new industries

    When the pricing system fails, there is a misallocation of resources

    Of the 12 largest companies in the renewable energy sector, which were collectively provided $6.5 billion in federal loan guarantees by the Obama administration, six have filed for bankruptcy. Solyndra is more rule than exception

    Up until about five or six years ago, U.S. Treasury auctions were watched carefully and considered important carriers of information about the outlook for the economy

    Now they are largely meaningless as the Federal Reserve effectively sets the prices and buys up some 60 percent the U.S. Treasury's debt issuance

    A sustainable economy requires that people have confidence that prices reflect true values and a viable future.

    Scott Powell.

    Full Story


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