Running Markets into Ruin
September 28, 2015
The impulse toward central planning often springs from the perceived need to solve a problem with a top-down solution. For Chinese Communists in 1949, it was local corruption and foreign imperialism. For the central planners at central banks today, the problem is deflation and low nominal growth. However, no individual, committee or computer program would ever have all the information needed to construct an economic order, even if a model of such order could be devised.
- Manipulated data provide false signals: "When a financial indicator becomes the object of policy, it ceases to function as an indicator."
- Central planning is impossible: optimality emerges from economic complexity spontaneously rather than being imposed by central banks through policy.
- Central bankers create asset bubbles: America is today witnessing its third stock bubble, and its second housing bubble, in the past 15 years. When these bubbles burst, the economy will confront a worse panic than occurred in 2008, and the bankers' cries for bailouts will not be far behind.
- Main Street is the primary victim: savers are penalized, small business lending shrivels, banks take on greater risks, stocks boom and bust.
Charles Kindleberger correctly identified the cause of the protracted nature of the Great Depression as regime uncertainty. This theory holds that even when market prices have declined sufficiently to attract investors back into the economy, investors may still refrain because unsteady public policy makes it impossible to calculate returns with any degree of accuracy.
The same malaise afflicts the U.S. economy today due to regime uncertainty caused by budget battles, health care regulation, tax policy and environmental regulation. The issue is not whether each policy choice is intrinsically good or bad. The core issue is that investors do not know which policy will be favored and therefore cannot calculate returns with sufficient clarity.
Source: James Rickards, "How Central Planning Ruins Markets," National Center for Policy Analysis, September 2015.
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