Thursday, 19 March 2009

Cause and Effect

Yesterday I posted on the Federal Reserve's decision to pump $1.2 Trillion of funny money in to the US economy.

Today the dollar crashed against every major reserve currency. Obviously the markets believe that harmful inflation is a more likely result than an economic recovery.

Note to Monetary Socialists of all parties: the Market is never wrong. You can no more defy the laws of economics than you can defy the laws of gravity.

9 comments:

AMcGuinn said...

"The market is never wrong" is something of an overstatement, and a particularly obvious one at this point in time.

RichW said...

The market is only a means of communicating information and knowledge between a near infinite number of interconnected parties. It reflects only the processes, decisions and value assumptions of all those taking part.

As I have said, the Government can no more legislate to reverse the laws of economics than a man who has dropped a heavy object on his foot can resolve to change the laws of gravity. In intervening the government becomes another player in this system, it operates within the general rules (though with the force of the coerced means of society), not outside them.

The market is never wrong.

Gandhi said...

I've just spent the last week telling my dad he's mad for buying a FTSE tracker. But HE thinks he's never wrong too... oh dear the irresistable force and the immovable object have met, expect fireworks! ;-)

TBR said...

Gravity and the market seem to be working in very similar ways at the moment.

AMcGuinn -- of course if we're going to be pedantic yes the market can be wrong. But usually this is for very short periods of time. But that is so long as the state doesn't get involved.

Gandhi said...

On the market is never wrong thing; semantics and trickery afoot. Richie, on the basis you've given it's quite true the market is never wrong - it is what it is; but in this context you're really just saying that the overwhelming majority (and their trades) are collectively never wrong about the likely effects of US policy making... Nope. But of course I would agree in this case, sending the dollar down-down-down is the right choice: well done countless faceless traders, that's stuck one in his eye!

RichW said...

It's not the 'countless faceless traders' (does it matter whether they are faceless or not?) that are sending the dollar down, the Federal Reserve is. They are merely trading using the new value of the dollar (or best assumption thereof.)

In anything but the extreme short term (and usually not even then) the imperfect knowledge of the sum total of individual market participants will always be less imperfect than the imperfect knowledge possessed by a few experts in Washington or Whitehall (unless an omniscient God starts offering economic advice to our policy makers).

Gandhi said...

1) I have no objection to countless faceless traders: I am one of them.
2) It is the MARKET that is sending the dollar down PROBABLY, mostly, as a RESULT of the Fed's action; there you go again with your teleological/consequentialist mindset. See this: Cause > Effect > Cause > Effect. You are trying to skip the two bits in the middle!
3) That's better, the people of the market - even collectively - make mistakes because they are not God; hence the market is not God, but your original post/language seemed to raise the market to the level of an all-seeing, all-foreseeing God-thing...
4) ...like Warren Buffett; he usually beats the market, but even He has been brought to His knees of late. We are running out of Gods!

RichW said...

The real value of the dollar has been debased by the Federal Reserve whether or not currency speculator recognise this or not now.

You can debate whether or not speculation can further drive down the value of the dollar (note: this is not the price, clearly it is driving down the price in the short term), and I suspect it isn't, the value has been debased by the Fed's actions. Even if the Fed could somehow secretly offload $1.2 Trillion into the economy without the speculators knowing, the market would still readjust eventually and you would see inflation.

And I didn't make any assertions about the omniscience of the market- as you said the market 'is what it is'. Now that may seem obvious to you or I, but I suspect the real nature of the market is not so evident to those decrying the free market right now.

Gandhi said...

You mean the Bolshevik Broadcasting Corporation (BBC) presumably; don't worry we'll get them all off state benefits and into proper jobs soon enough.