Investing and “the Economy” as Such

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“The economy is doing well” or “the economy has reached a stand-still” or many other myriad ways to refer to “the economy” should always be taken as a metaphor. And yet, quite obviously, this is not actually the way that the mainstream economic thinking works. For them, the economy is treated as an entity independent of the millions of individual human beings acting according to their own goals and values.

In this way, so-called “macroeconomics” is distinct from (and sometimes even contradicts) “microeconomics.” This can be seen especially in the old Keynesian problem of the “paradox of thrift.” The paradox of thrift is the idea that while putting more money away into one’s savings may be good for the individual, it is actually harmful for the greater economy, which allegedly (especially according to the vision of John Keynes) depends on consumption spending and consumer demand. This distinction/tension between “the economy” and the individual human actor is one of the several great faults in the Keynesian paradigm, and it blinds them to the problems with a government or central bank acting in effort to heal the overall economic picture.

Moreover, the entire enterprise of “macroeconomic data” including GDP, CPI calculations, monthly jobless claims, and other “economic indicators” that supposedly point to the health of the economy at large comes about as a result of the mentality that macroeconomic information is helpful as such. But in the free market, this type of information is wholly unnecessary. Investors would have no use for it at all if the entire industry of investing wasn’t wrapped up in political and central banking (which of course is a government created entity) affairs. The free market entrepreneur, looking to employ his capital in profitable ways, has no particular need for government macroeconomic statistics.

In reality, these data really only serve to encourage and bring about government responses to the information; that is, the only purpose this information serves is to help influence financial and monetary “policy.” The reader is likely so engrained in our statist way of thinking about the economy, that he considers government economic “policies” as just a way of life. But this should not be so. Almost by definition, government economic policies are interventions into the market. It is a lack of “policy” that is praiseworthy and healthy for economic progress.

But governments, if they are to enact policy and attempt to manage the economy (which is an effort doomed from the start), will need “data.” And indeed, consider what Zachary Karabell wrote in his fantastic look at the history of “economic indicators:”

The notion that a professionally run government could maximize a society’s output and stability through the application of scientific principles had widespread appeal, but almost every country lacked one key element: information. Yes, as we saw, governments had long been keeping track of trade and agriculture— the two traditional sources of wealth and power. But scientific management of society required data, and there, most societies and most governments were largely in the dark. As of the middle of the nineteenth century, almost every metric we now take as a given— from health statistics to economic data— simply did not exist.

In the United States, the birth of economic statistics was part of an overall movement toward social and political reform. The drive to create these statistics was fueled in part by a rising national suspicion that large companies, monopolies, railroads, and banks were reaping disproportionate rewards and thereby robbing the common man of his hard-earned gains. In Europe, a similar sensibility led to an efflorescence of Socialist movements, not to mention the birth of Communism. In the United States, it led to the birth of unions. Unions, in turn, believed that labor was being deprived of its rightful share of prosperity, but they couldn’t prove that. Hence the attempt to measure just what was going on in order to add weight to the widespread sense that many were suffering unnecessary hardship.

Karabell, Zachary (2014-02-11). The Leading Indicators: A Short History of the Numbers That Rule Our World (pp. 28-29). Simon & Schuster. Kindle Edition.

In other words, the entire assumption in the effort toward macro data collection is that governments and central banks need these statistical gathering efforts in order to make the right decisions for the economy. For if the central bank needs to decide whether to raise or lower interest rates, whether to stimulate the economy by way of increased treasury purchases, and so on, they need a justification to act. And so exists the power of the statistics industry. Frank Shostak observes:

The entire army of economists is busy guessing whether the central bank will lower, or raise, interest rates. Moreover, to provide a rationale for all this, a new form of economics labeled macroeconomics was invented. Needless to say, this type of economics doesn’t deal with the real world but rather with a nonexistent entity called the economy. 

By means of the GDP framework, government and central bank officials generate the impression that they can navigate the economy. According to this myth, the “economy” is expected to follow the growth path outlined by omniscient officials. Thus whenever the rate of growth slips to below the outlined growth path, officials are expected to give the “economy” a suitable push. Conversely, whenever the “economy” is growing too fast, the officials are expected to step in to cool off the “economy’s” rate of growth.

However, for the investor in a free market; for the capitalist needing to make choices about where his capital is most urgently needed on the market, this information actually does not help him. The entrepreneur needs very specific information about the needs and trends of consumers, about how they react to and/or embrace specific products. If there is no specific information, there is no knowledge about the most advantageous location for one’s investments. The investor is looking for specific avenues wherein he can make a profit and which avenues to avoid so that he does not result in a loss. If he makes the wrong decision, he will not earn a return on his investment.

The investor needs to know, not about GDP and jobless claims, but about the health of a company; about its costs, its debt load, its profit margin, its leadership, its history. He needs to know how the company plans to cope with changing consumer demand, with threats from the competition, with internal management.

The metaphor of “the economy” should really just point to the conglomeration of individuals producing and providing goods and services, and exchanging them for the goods and services that they anticipate will aid them in the satisfaction of their goals. It is possible to refer to the interaction of millions of producers and consumers as “the economy” but we must never mistake this economy as something that has a life of its own. It is actually government that has a tendency to refer to the economy as something in and of itself, as Frank Shostak notes:

While in a free market environment the “economy” is just a metaphor and doesn’t exist as such, the government gives birth to a creature called the “economy” via its constant statistical reference to it. For example, the government reports that the “economy” grew by such and such percentage, or the widening in the trade deficit threatens the “economy.” The “economy” is presented as a living entity apart from individuals.

The problem for investors in our central bank-driven economy however is that there is no free market and much of it is “planned” by the Federal Reserve and its monetary manipulations. So whereas in a free market, entrepreneurs and investors must act according to specific information, the fact of the matter is that the Fed completely distorts this information and instead focuses on macro-level data. Due to the constant increase in the rate of money supply growth, we have the phenomenon of “sector” level “investments” such as ETFs (more on these in an upcoming post). This makes the investment role especially difficult to navigate. In the short run, that is, in the last several years, the money supply has been constantly growing due to Fed policy, as can be seen here:

Concurrently, the S&P 500 is experiencing the bubble that results from the money supply growth (see my article here).

Yes, the stock market bubble, “great” GDP numbers and various other macroeconomic indicators tracking “the economy” give the illusion that “the economy” is in wonderful condition. But this is merely a mask over the severely problematic wealth destruction trends that result from an artificial (that is, Fed-driven) increase in the supply of money and credit. This is the boom that precedes inevitable bust. Whereas most people assume that booms and busts are just the way capitalism works, in reality, booms and busts are caused by government-backed monetary manipulations that could not and would not happen on the free market.

In the end, we need to understand that helping “the economy” to achieve its statistically driven numerical levels is completely besides the point. Real growth doesn’t depend on booming stock market price levels (as if making things more expensive is prosperity) or a growing GDP; and in fact, a rising GDP can indicate that a great misallocation of resources is taking place that will eventually needs to be corrected in a painful economic bust. In the meantime, we do wonder how much longer the Federal Reserve will try to keep the markets propped up via its interest rate peg and its money supply growth efforts. In preparation for the long run, a much better investment solution is needed for individuals looking to weather the storm.

It is our hope that one day, capital markets across the world can fulfill their proper economic function of price discovery and discounting future cash flow; rather than act as a gambling house for fund managers controlling the retirement accounts for millions of unaware people.