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Musings Report 2022-44 10-29-22 Are You Sure About That?
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For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
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Are You Sure About That?
I am continually amazed by the confidence pundits place in their own prognostications. To name just a few:
-- When the yield curve inverts, recession is inevitable / guaranteed.
-- We're running out of oil.
-- We'll have plenty of oil/gas for decades to come.
-- China will inevitably become more democratic as its economy enriches its citizenry.
-- The US dollar will collapse along with all fiat currencies.
and so on. We ask: what makes you so sure about that?
The answer boils down to some version of 1) history and 2) policy.
In the past, when A happens, B follows, so this progression is a causal "natural law" we can count on working every time, everywhere.
As for policy, when the central authorities want something to happen, they create incentives (carrots) and disincentives (sticks) to make it happen.
The problem with these certainties is two-fold:
1) Complex systems such as economies, wars, global trade, societies, etc. are emergent systems where feedback and leverage points change the system on their own rather than by the commands of some central authority.
2) Emergent systems respond to initially small changes in participants in ways that don't respond to history ("i.e. "this should happen") or authorities' commands / intentions.
A good example is how reintroducing predators into national parks ends up changing the entire riparian ecology and even the course of rivers as an over-abundance of deer is reduced by predation.
Foliage and trees that had been suppressed by over-grazing reappear, and this generates second-order effects in other wildlife which eventually changes the river itself.
My recent post on how well-intentioned policies created two kinds of "rat farms"-- centrally mandated sewers and private-sector rat farms generated by financial incentives to bring in dead rats--is another example of how systems do not respond as we expect.
We approach a problem or situation with biases built into our approach. If we pride ourselves on being data-driven, we fall into the trap of "we only manage what we measure."
Whatever isn't easily quantified is ignored, and so what happens when the unquantifiable turns out to be consequential?
The other data-trap is false precision, where the data persuades us of some certainty / causality that turns out to be false.
A classic example in warfare is toting up combatants and equipment and declaring numerical superiority defines the victor.
Unit cohesion, flexibility of command and the motivation of those risking their lives turn out to be more consequential than numerical superiority. (The quality and maintenance of the combatants and equipment matter, too.)
If we rely on history, we tend to simplify whatever muddies our conclusions, and focus on whatever supports our thesis.
So the economic pundits who are supremely confident that yield-curve inversions cause recessions are ignoring many other dynamics that might not fit so neatly into their thesis.
How far back in history can we go with reliable data? Not very far. So we focus on the last 40 years or at most the past 70 years.
But what if the big moving parts have changed in character? For example, the workforce was expanding for the past 70 years, and so employment was sensitive to demand and the cost of money (interest rates).
But now that the workforce is shrinking (and shrinking rapidly in many nations), labor shortages are changing the nature of employment in ways pundits looking at recent history do not grasp.
The immense changes in capital flows as reshoring and friendshoring accelerate are also a new factor.
The certainty that monetary policies alone (central banks changing bond yields) guarantee recession may prove to be hubris.
As for China, we can discern a cycle stretching back to at least the Tang Dynasty (700-900 AD) of China opening to the world and then turning inward.
The opening phase is expansive, the turning-inward phase leads to stagnation. This cycle is not unique to China, but it's particularly consequential in Chinese history..
Hydrocarbons are in the news: war, climate change, etc. The debate over whether we're "running out of oil" or entering an era of super-abundance of energy may not be the critical factor.
What may matter more in the short-term is how much oil is available on the global market and how much disposable income households have to spend on other goods and services after paying for energy, shelter, food and healthcare.
Roughly 2/3 of the world's oil supply comes from a relative handful of giant and super-giant oil fields (around 40).
The reason why it's not possible to predict how much oil can be extracted is technology and costs change. If a super-giant field moves from 50% of the oil being recoverable to 65% recoverable, that's a very large quantity of "new" oil.
But the cost of extracting that oil (as measured in the energy needed to get it out of the ground--EROEI) goes up, pushing the cost higher.
In an economy of rising real wages and wealth, cost increases may not matter much. In an economy of declining real wages and wealth, it might matter a lot.
Who controls those 40 fields producing 2/3 of the world's oil matters should the owners start distributing oil for reasons other than market price.
As for the US dollar collapsing. Well, maybe. Emergent systems are not linear and predictable.
For context: US GDP is $25 trillion. US federal debt is $23 trillion. The Federal Reserve balance sheet is $8.7 trillion. US household wealth is $150 trillion. Real M2 Money Stock of the US is $7.25 trillion. US monetary base is $5.4 trillion..
The recent expansion of the monetary base is not unique to the US. The Swiss monetary base expanded at about the same rate, yet the calls for the collapse of the Swiss franc are far fewer than those predicting the collapse of the US dollar: Switzerland's mountainous monetary base
It's not clear why a relatively modest monetary base and central bank balance sheet should lead to the collapse of a currency.
Finally, there are many issues where the evidence--prone to being cherry-picked or flawed by false precision--is contradictory.
As Allison Schrager writes in Bloomberg Opinion, "We’re in unprecedented times, and it’s just as likely we’ll slog along full of uncertainty as it is that inflation will lead to a deep recession."
As I posted here recently, rather than run from one claim of certainty to another as each one dissolves, a better strategy is to embrace uncertainty.
Highlights of the Blog
What Does Liberation Mean in the Real World? 10/28/22
The End of the "Growth" Road 10/25/22
Now That Housing Is Rolling Over, Is That Fixer-Upper a Deal? 10/22/22
Best Thing That Happened To Me This Week
We made a coconut cake with freshly grated coconut from our trees for a family friend's 90th birthday party.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Trove of stolen photos reveals Oakland street life in the 1970s-- stolen photos dumped in a trash heap on a sidewalk...
‘Let it rot’: Once-flourishing middle class faces end of ‘Chinese Dream’--it's called "opting out"....
China reportedly made an app to show people if they're standing near someone in debt
Great International Locations For High Quality, Inexpensive Medical Care -- medical tourism makes sense for those paying cash...
How digital media drive affective polarization through partisan sorting-- important: it's not just "echo chambers" that drive polarization, it's seeing opposing views everywhere, too....
Understanding Two Decades of Music Catalog Purchases -- billionaires skimming old music catalogs....
Make electric vehicles lighter to maximize climate and safety benefits--file under obviously sensible but boring and unsexy....
Electric Car Subsidies Are A Bad Investment | Opinion
Endothelial dysfunction in COVID-19: an overview of evidence, biomarkers, mechanisms and potential therapies.
"Green Capitalism" Is a Lie-- more like a cover story than a lie....
Unless Rents Rise, Housing Is Set Up for an Epic Crash (Bloomberg)
China’s Surveillance State Pushes Deeper into Citizens’ Lives: Xi has taken government tracking to new levels during the pandemic (WSJ.com)
"The more powerful and original a mind, the more it will incline towards the religion of solitude." Aldous Huxley (via Michael K.)
Thanks for reading--
charles |
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