Outside the Box

Flawed Assumptions and Grand Experiments

April 20, 2016

Over the last few years, I have from time to time had the real pleasure of being in the presence of Lakshman Achuthan, Chief Operations Officer for the Economic Cycle Research Institute, a rather serious team of economists who spend their time researching economic cycles, especially those around recessions. They are known for having forward-looking models rather than always looking in the rearview mirror.

Every time I get around Lakshman I walk away impressed. And I always make a mental note to myself that I need to invite him to speak at my conference – but then manage to file that note somewhere where it doesn’t come up when I’m putting the speakers together. If I post this note in front of 1 million of my closest friends, maybe I’ll remember it for 2017.

Lakshman sent me the speech he presented at the 25th Annual Hyman Minsky Conference, and he has graciously allowed me to share it with you as this week’s Outside the Box.

One point he makes strongly in the initial part of his presentation is the readily observable fact that each recovery since World War II has been a little bit weaker. And that gives me pause, because that means that after the next recession the recovery will be even more anemic than the current one has been. Thus, absent any significant policy change – and by that I most definitely do not mean the Fed’s giving us more of the same; I mean a clear-cut change in the philosophical drivers of the policy – the US economy is going to look more and more like the Japanese economy.

Not that Japan is a bad place to live. Most Japanese have a relatively high standard of living, and life goes on – there’s just not a great deal of growth and all the wonderful things that happen along with that growth. So instead of actually growing its economy, Japan has piled up a huge mountain of debt, prone to unpredictable “landslides.”

I have been saying for years that the Federal Reserve is using the US economy as a big test lab for their monetary theories. This is unlike going to the doctor, where there is generally a prescribed treatment for the problem you have. The Fed is experimenting without understanding the full consequences, let alone the unintended consequences, of their policies. In the piece that follows, Lakshman very effectively criticizes not only the Fed but central banks in general for their false assumptions and grand experiments. This is a growing theme. Even Nobel laureate Joseph Stiglitz, with whose policy recommendations I frequently disagree, jumped on the bandwagon this week at Project Syndicate with a serious smackdown of the Fed, suggesting they have no idea how to create a model for the economy, and that to pretend they can create one and then prescribe policies based on it is folly.

I feel like I’m being mentally and psychologically whipsawed as I swing back and forth from looking at today’s economy to working on a book about what the world will look like in 20 years. There are many aspects of our lives that will get so much brighter – well, except for the economic part. But I think we’ll manage to work through the worst of the crisis in the middle of the next decade and can then get back to the serious business of growing our economy in a more or less normal fashion – in a world that will be anything but.

I went to the eye doctor yesterday, simply wanting to a new prescription for my reading glasses. I hadn’t been in, oh, maybe a decade. They did the usual full range of tests on me; and then when the doctor finally walked in and found that I just needed glasses and was thinking about having another round of Lasik surgery, he stopped me. “You don’t want just reading glasses,” he pronounced. “The prescription I’ve given you can be used just for reading glasses, but you probably want to get a pair of glasses you can wear all the time. And I don’t think you should get LASIK today, because your eyes are still pretty much within range; and in five years we’ll have a new technique that’s been developed in Europe that will allow us to put a lens in your eyes and then do the LASIK directly on the [I assume plastic] lens; and then if you ever need to have further work done, you can come in and we can work on that lens again.”

Wow, I just have to wait for the FDA to get around to approving something that is already available in Europe, and then I can have 20/20 vision for the rest of my life! Sounds like a major improvement to me. And there are literally hundreds of similar things in the works that will arrive in just the next 5 to 10 years. When you go out past 10 or 15 years, it truly gets amazing.

All that being said, I wonder what a slow-growth world, with the continuing technological overtake of many jobs that can be automated, will mean to the younger generation. And then I read this week about the disparity between the lifespans of the rich and poor, with the oddity thrown in that the poor in inner cities like Los Angeles live almost as long as the rich in those cities, which tells me that longevity is about more than just access to healthcare. The researchers are just scratching their heads; they can’t figure it out either. Life is just one puzzle after another. You have a great week.

Your trying to solve a 10,000-piece puzzle analyst,

John Mauldin, Editor
Outside the Box

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Flawed Assumptions and Grand Experiments

By Lakshman Achuthan
Presented to the 25th Annual Hyman P. Minsky Conference, April 2016

This year began with recession fears throwing a spotlight on the elephant in the room. As the cover of The Economist put it a few weeks back – central banks may be out of ammo to fight recession.

How and why did we get…

Discuss This


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Nick Proferes

April 22, 10:37 p.m.

Very interesting article.  I was wondering as I read through it of the effects of increasing globalization of economies on the recoveries from recession as it seemed to be so US focused.  He touches on that at the end but it seems to me to be a major factor, providing a dampening effect, or stimulus effect depending on your timeframe.  Prior to so much interconnection and interdependence, if the US fell into a recession and the rest of the world still doing OK, recovery would tend to be fairly swift, but in recent years (and considering that the latest one was worldwide) with the rest of the world in recession, it is hard for the US to pull out depending largely on internal demand and spending.


April 22, 12:25 p.m.

I’m not an economics expert.  But it seems to me way too much emphasis in modern economics is centered on the FED, ECB, BOJ, etc.  It’s as if they are the only ones who have a hope of altering the economy.  IMO, government regulation (too much), and a increasingly “lazy” culture are more to blame.  Hard work, and competition, and job training are stigma’s in today’s society.  Just look at the term “nerd”.  This is a slap in the face to someone who does well in school.

I don’t see how any amount of FED policy can fix the root problem. Hence why do we look at is as the end-all for economic growth?

jack goldman

April 21, 4:32 p.m.

Jared DIllian just had a nice puff piece on bankers. I wish he had a response box. Bankers are evil because they engage in fractional reserve banking, earning 40% when lending at 4% or 180% when lending at 18%. Bankers are in a rigged counterfeiting game that has cost Americans 6% a year in inflation since 1966. Bankers are not innocent puppets. Bankers have a rigged game including the Fed, counterfeiting the dollar, charging Americans 6% on issue us our own money. Jared. Wake up and smell the coffee. Bankers have duped America into being debt slaves. I believe bankers chose to do the devious debt slavery we don’t need. Jared. That you have written some excellent stuff but that post was the dumbest, most naive out of touch piece you have done.

Dock Treece

April 21, 10:30 a.m.

Great article but I think a simple conclusion will explain the problem. Debt is simply pulling future purchasing into the present. As an economy or government borrows more and more there is less ability to pull forward or it takes more and more money to have an impact. There is a limit.

Jack Hiller

April 20, 11:03 p.m.

The regression analyses are very interesting. The finding of a reduced spring back after recession over time or cycles is also intriguing. One common weakness with regression analysis conducted over extended time periods is that the conditions in which the data were collected to represent each time period or cycle may substantially change over time, with important change moderator or predictor variables not being included in the regression analysis, so that prediction error is larger than it need be, and conclusions are not as strong as them might be. For example, the USA has shifted from an agrarian economy, to a manufacturing economy, to an economy in which manufacturing has declined while services have increased as a percentage of the gdp. Manufacturing may be highly cyclical in nature, whereas servicing is comparatively stable thru economic cycles; granted that services become less affordable and thus wither too during a downturn—but not nearly as much as manufacturing. The attenuation in the spring back may thus be reflecting the shift away from heavily cyclical manufacturing to more stable servicing. This hypothesis ought to be easy to check by reanalyzing the data with an additional variable, such as the ratio of manufacturing value to servicing value in constant dollars for each time period.


April 20, 10:24 p.m.

Submitted by James Kottenstette.
It has been a joy to read an explanation for the failure FED monetary policy initiatives of recent years presented against the backdrop of failed fiscal policy over the course of the last 50-60 years. The author presents about a dozen charts that show patterns of decay in the economic indicators tracing our recovery after US recessions. For me, this record of “fatigue” is an indictment of our mistaken fiscal policies that for years fostered more and more debt…and now a more severe indictment for our failed Trillion dollar FED initiatives.

fred sauer

April 20, 9:58 p.m.

Hi John, you are writing a book about 20 years in the future. You may want to consider long-term weather patterns based on Astrometeorology: from the NASA website you can see solar activity is definitely on a sharply lower trend:

if this continues we’ll have a cold-period like that during the early Renaissance. Everything in agriculture, energy and business would change. Read up about the “Maunder Minimum”:

This is certainly opposed to the current “religion” of global warming, which BTW was clearly predicted by solar radiation patterns. There was a similar pattern during the Middle-Ages with the Vikings farming in Southern Greenland and finding wine in “vineland” = our New England and the Normans’ wine growing in southern England. May I remind you that the Vikings has no cars or power plants, I don’t think their personal exhaust would have influenced the climate that much. There is more information from some ‘wild guy’ who sounds very plausible however. But even with my 2 engineering M.Sci. I can’t really verify his math. You certainly have the resources to do this. It would be very critical for your 20 year book or it might be just an exercise missing a potentially critical puzzle piece.

Warm regards,  Fred Sauer




peter brown 30484

April 20, 9:42 p.m.

Canute had no control over the incoming tide just as central banks have no control over the economic cycle. Are they futilely pushing growth for growth’s sake, or desperately trying to prop up insolvent banks?