Economy

In a different time we could happily go about our lives, ignoring economists as largely irrelevant to our daily lives. That is no longer the case.

In helping to shape central bank policies, economists are performing one of the largest social and monetary experiments in all of history, and its outcome, good or bad, will shape all of our lives enormously over the coming years. In fact, this experiment is already well underway and yielding results. Perhaps not the desired results, but results nonetheless.

The biggest problem with most, but not all, economists is that their theories are founded on incorrect assumptions.

This biggest of them all is assuming that the economy has some sort of an ‘equilibrium point,’ a magic place where just the right number of monetary actions and policies will create high jobs, price stability, and economic growth.

Unfortunately, this is just completely the wrong way to look at things.

Niall Ferguson recently pointed this out and made a critically important point:

This is the title of a recent editorial in the New York Times. It asks an extremely important question, one the gets right to the heart of our economic future.

For ‘the system’ to operate well, the game must go on, and a big part of that game requires individual investors, either directly or indirectly via their pensions, to continue to contribute their hard-earned savings into the stock market casino.

For a very long time, stocks have been viewed by many as the path to building wealth. Recently it has become clear to many that stocks are little more than a way for well-connected Wall Street and corporate insiders to enrich themselves at everybody else’s expense. Stocks are a confidence game and all but a privileged few are the suckers, is how one prominent line of thinking goes.

The New York Times editorial addresses a very important topic, and even gets close to the core issues, but misses the mark by failing to go far enough and connect all the dots.

In justifying the massive money printing operations of the Fed, Bernanke used inflation data to bolster his case that the Fed’s actions are both prudent and worth continuing.

Here’s what he said: