Why Our Central Planners Are Breeding Failure

Success, we’re constantly told, breeds success. And success breeds stability. The way to avoid failure is to copy successful people and strategies. The way to continue succeeding is to do more of what has been successful.

This line of thinking is so intuitively compelling that we wonder what other basis for success can there be other than ‘success’?

As counter-intuitive as it may sound, success rather reliably leads to failure and destabilization. Instead, it’s the close study of failure and the role of luck that leads to success.

In the macro-economic arena, I think it highly likely that the monetary and fiscal policies of the past six years that are conventionally viewed as successful will lead to spectacular political and financial failures in 2015 and 2016.

How can success breed failure?  It turns out there are a number of dynamics at work.

Survivorship Bias

Survivorship Bias is the natural tendency to look at the survivors for the keys to success rather than to examine those who didn’t survive, many of which disappear without a trace. If 100 restaurants are founded and five of the new eateries achieve rip-roaring success, business schools usually study the decisions and strategies of the five survivors, not the 95 failures which closed their doors and left no trail of decisions and strategies to study.

As David McRaney observes in his excellent account of survivorship bias, by focusing solely on survivors rather than those who failed, the causes of failure become invisible. And if the causes of failure are invisible, the critical factors that determine success also become invisible.

Even worse, we draw faulty conclusions from the decisions of the survivors, as we naturally assume their decisions led to success, when the success might have been the result of luck or a confluence of factors that cannot be reasonably duplicated.

We are often reassured by the financially successful that perseverance and the willingness to accept risk are the key factors in success.  But as McRaney explains, this is the equivalent of asking the one actor from a rural state who achieved Hollywood stardom for the key factors of his success, on the assumption that anyone else following the same path will reach stardom.

But magazines never track down the 100 other aspiring actors from the same region who went to Hollywood and persevered and took risks but who failed to become stars. Examining the few hundred miners who succeeded in finding enough gold in the Klondike in 1898 and returning with enough of their newfound wealth to make a difference in their life prospects while ignoring the experiences and decisions of the 100,000 who set off for the gold fields and the 30,000 who reached the Klondike but who returned home penniless (if they survived the harsh conditions) will yield a variety of false conclusions, for luck is never introduced as the deciding factor.

The narrative that success breeds success has no role for luck, which is by definition semi-random and therefore uncorrelated to the stratagems of the survivors. Here is McRaney’s summary of the role of luck:

In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book Thinking Fast and Slow, “A stupid decision that works out well becomes a brilliant decision in hindsight.” The things a great company like Microsoft or Google or Apple did right are like the (World War II) planes with bullet holes in the wings. The companies that burned all the way to the ground after taking massive damage fade from memory. Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.”

Drawing Over-Arching Conclusions from Single Examples

A similar form of bias appears when commentators attribute China’s great developmental success to its command economy, or Silicon Valley’s enduring role as a center of innovation to America’s military-industrial-academic-research complex and the U.S. culture’s broad acceptance of risk-taking.

Who can say with certainty that another model of development might have duplicated China’s growth record but avoided the endemic corruption, environmental destruction and widening wealth inequality that are the negative consequences of the command-economy model?  No one can say, as there are no other Chinas to refer to for comparison.

If duplicating Silicon Valley were just a matter of government support of research and close ties between corporations and universities, there would be dozens of Silicon Valley rivals, as billions of dollars have been expended globally to duplicate the Silicon Valley model. But Silicon Valley remains in a class of its own.  Clearly, Northern California’s engine of innovation cannot be distilled down to a simplistic model that can be duplicated by policies and investment.

The conventional conclusion that the major central banks—the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China—succeeded in saving the global economy from depression in 2008-09 is another example of drawing over-arching conclusions about success from single examples.

Since each nation/region is unique, any claim that the policies of any one central bank can be applied to other nations/regions with equivalent success is a highly questionable assumption.  Since there is only one European Union, Japan, China and U.S.A., there are no opportunities to test the assumption that the central bank recipe used in 2008-09 can be applied with equal success in future financial crises in these very different economies.

Previous Policies Have Changed Conditions

One reason we cannot draw over-arching conclusions about the drastic monetary policies enacted in 2008-09 is that those policies have changed the financial-political landscape. As a result, what worked in 2008-09 may not succeed in the next financial crisis because those policies only worked in the specific set of conditions of that crisis. If the conditions have changed, then the strategies that were ‘successful’ in the previous set of conditions will not yield the same outcome.

For example, central banks lowered interest rates to near-zero in 2008-09 to spark borrowing and refinancing of existing debt. Now that rates are still near-zero, this policy and outcome cannot be duplicated.  Lessons drawn from successes that cannot be repeated are suspect.

Previously successful policies may fail in the next crisis due to diminishing returns: for example, policies that extend credit to marginal borrowers to bring demand forward (i.e. subprime auto loans) eventually reach all but the riskiest borrowers.  Extending those policies essentially guarantees rising defaults as people with no business borrowing money are given credit to maintain consumption.

As defaults soar, lenders record losses and sales decline, as consumption was already brought forward.

Due to diminishing returns, a policy that was successful at first fails when extended.

In effect, successful policies may be time-stamped; not only do they only work in specific circumstances, they only work for a limited length of time in those specific conditions. Beyond those conditions and timeline, the supposed factors of success no longer work.

Are the Outcomes of Monetary Policies Truly Predictable?

As noted above, any policy identified as the difference between success and failure must pass a basic test: When the policy is applied, is the outcome predictable?  For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?

The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.

Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?

We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.

The Seeds of Failure Are Sown in the Initial Flush of Success

Even more troubling is the possibility that these monetary policies have sown the seeds of systemic failure in their pursuit of the extremes that yielded the initial flush of success.

That this initial success might be brief and transitory rather than enduring is rarely considered.  If this is the case—and the slowing global “recovery” suggests this is indeed so—then the success of these extreme policies is illusory, and the truly key determinants of success and failure remain elusive.

In Part 2: The 6 Reasons The Next Economic Rescue Will Fail, we examine why the current unstable “recovery” must topple despite the central planners’ best efforts to sustain it. They simply don’t have an accurate awareness of the true situation, nor have the right tools and skills to address it — and so, in their ignorance and fear, are pulling levers that are inconsequential (at best) or will hasten the destabilization of the system.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

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  • Nov 4, 2014 Ron Paul: US elections are a one-party monopoly

    The “monopoly of a one-party system” is all too evident in the midterm elections, according to former Texas congressman Ron Paul. Speaking to RT’s Ben Swann and Erin Ade, the Libertarian outlined what he thinks of the current political system in America, and what he expects the outcome of today’s elections to be.

    http://youtu.be/ry3NHkINjTg

  • jadan

    There are no “central planners” in the US economy. The Fed attempts to please it’s stakeholders by adhering to “market principles”. One of these principles is lots of cheap credit for hedge funds, banks, and others who love to gamble. The Fed’s stakeholders are the owners of the Fed system, the financial elite that owns most of everything else.

    “Who can say with certainty that another model of development might have
    duplicated China’s growth record but avoided the endemic corruption,
    environmental destruction and widening wealth inequality that are the
    negative consequences of the command-economy model?”

    This statement is just ridiculous, the pot calling the kettle black. Obviously, China’s so-called “command economy” represents a genuine central planning entirely lacking in the US. The Chinese do not operate on the pretense that a market economy and central planning are at loggerheads. They have no illusions about “free markets”. The key to understanding the Chinese success is the state run banking system, which, unlike the Fed, allocates credit based on a centrally planned outcome for the economy as a whole. The US economy is flagging because there is no central planning and there is no financial authority to look out for the public interest and see that credit is allocated where it needs to go, not where a gambling elite wants it to go.

    This essay is bullshit. It seems to be unaware of its own assumptions and is incapable of self-examination. I believe this is called “American exceptionalism”.

    • ClubToTheHead

      US Chamber of Commerce is a central planning committee. It has been from the very writing of the Constitution.

      • jadan

        It is another lobby and has no control over monetary policy. That’s the Fed’s bailiwick.

        • ClubToTheHead

          If you believe that there exists a separation between “public” and “private” sectors. Naive if you do.

          Contrary to popular understanding, this is not a nation under law, but a nation of those above and below the law.

          • jadan

            The distinction is explicit in the Constitution though the republican system describe there has failed. More apropos is a statement ascribed to an early Rothschild: “Give me control of a nation’s money and I care not who makes its laws…”

          • ClubToTheHead

            “Give me control of a nation’s money and I care not who makes its laws…”

            No dispute on this point.

            But…

            The Fed does not stand independent of the laws that enable it, and the state’s capacity for armed violence to enforce those laws on subordinate populations, both domestic and international.

            The money of a failed state power has no value at all. Try buying anything with the currency of a collapsed state.

            Fiat money has no value without backing by a credible threat of state violence.

          • jadan

            The value of a nation’s currency is determined by political stability and economic productivity. The yen has always been a major player and Japan is and has been a pacifist state. It can’t make a credible threat to blow you up, but it can build a damn good car. That’s what makes a currency. Switzerland is another very stable country that has no big stick to beat others with. You can’t enforce the value of a currency. People don’t use the FRN because of the badass US military machine. The value of the FRN is actually undermined by gross expenditures on military shit…..

          • ClubToTheHead

            The US enforces the value of its currency by enforcing the price of oil in US dollars. Part of the reason for invading Iraq was the threat of its using other than the US dollar.

            The US dollar is backed by its control of the world’s oil producing regions.

            The value of the US dollar defaulted from the gold standard and became backed by the US military power enforced law without a whimper from the defrauded. If the US collapses the worlds reserve currency will become the same value as recycled newspaper.

            The Eurozone is puppet to the US, not because of its industrial dominance but because of US military dominance of industrial and oil production.

          • jadan

            The petrodollar is a huge advantage for the US, but the use of the dollar as a global reserve is not enforced by the US military. It is voluntary. This is the prerogative of the superpower. Nations are not coerced into using it. The FRN has been a stable currency because of the size and dynamism of the US economy. Price stability is the chief justification for using the dollar, not missiles aimed at your country. It’s true that Saddam switched to the euro for his oil transactions and lost money doing it, cutting off his nose to spite his face, but the reason the US invaded was Saddam’s pan-Arabism, more than his challenge to the petrodollar which didn’t amount to much. The same can be said for Ghadafi.

            Precious metals were demonetized because they don’t work. The history of the gold standard is deflation and poverty for the masses. Capitalism and the US economy are currently in crisis, but fiat money is not the problem.

          • ClubToTheHead

            You Are attributing things to me that I did not say. I won’t waste my time responding to them.

    • Sunny
  • ClubToTheHead

    There are stories by men about dolphins that pushed them toward shore. There are are no stories by men about dolphins who pushed them out to sea.

  • 11 top economists agree: our world of debt is on the edge of collapse, January 17, 2015

    A collection of nearly one dozen of the world’s top economists and other geopolitical observers believe that the world is close to financial collapse, because so much of what passes for “the global economy” is built on false or otherwise conjured pretenses.

    As collected by Michael Snyder, founder of The Economic Collapse Blog, here are what 11 experts are saying about geopolitical conditions the world over:

    http://www.naturalnews.com/048322_financial_collapse_Federal_Reserve_global_economy.html