The Last Eight Words.

Here is a great paragraph that says about all you want to know about elitist academic economists and their kind. If the words pathetically insular come to mind you are on to the whole scam.

One of the articles referenced in Janet Yellen’s Jackson Hole speech last week was a piece written for the Peterson Institute for International Economics by Senior Fellow Olivier Blanchard. Dr. Blanchard has, as noted earlier today, all the “right” credentials, which is why his conjecture gets included into the speeches of Federal Reserve Chairmen. Having taught at both Harvard and MIT, becoming chair of the economics department at MIT for five years, landed Blanchard the role of research director at the IMF. Private experience is obviously missing from his resume.

The most important and truthful part of the paragraph is the last eight words.

Here's more to show just how desperately these people are lost, alienatated in their economic cocoons fron any sense of reality, yet urging the rest of us they somehow have the answers and if we we're not so ignorant we'd lockstep with them over the cliff.

Dr. Blanchard’s article was an attempt to “explain” the yield curve in the United States. Economists like Blanchard are so indoctrinated in central bank and QE mythology that what is exceedingly simple is dismissed as impossible. Persistently low interest rates are proof of “tight” money in the real economy; but that just can’t be with QE and all the amassed central bank intellectual capacity in that area. Instead, they must make the most absurd arguments to try to square a circle of their own often circular logic or paradoxes (central bankers know everything about money but now central bankers are stumped, therefore it can’t be money?).

You can read his whole argument and decide for yourself, of course, as I will only highlight but one of three reasons he specifies as really a window into this academic divide. One of the primary correlations in this view, which isn’t necessarily consistent with actual data, is that low rates are a function of low productivity and expectations for continuing low productivity. Blanchard tries to argue that while the crash in 2008 might explain the lack of productivity in the immediate aftermath, it doesn’t do much to render understanding about why it appears to have lingered.

To have become permanent, he contends, is the partial responsibility of “gloom”; I’m not making this up. He actually writes, “I believe that this bad news about the future largely explains the relative weakness of demand today.” And that sets up what is a very good example in how economists think not about the economy in which we all live but the “economy” where models prevail.

It is useful to play with some numbers here. Suppose that you learn that your income over the next 30 years will rise at 4 percent rather than at 5 percent as you expected earlier (because income typically increases with age, individual income typically increases faster than aggregate income). This represents a roughly 20 percent decrease in the present value of your future earnings, and is likely to lead you to consume say 10 percent less. If this realization comes to you over a period of five years, you will decrease consumption by 2 percent each year relative to your income. Returning to aggregate implications, as consumers adjust their expectations the way you do, consumption growth will be weak. The same argument applies to investment. The lower the expected growth rate of profit, the lower the desired level of capital, and this in turn will lead to a period of low investment until the new lower level of capital is reached.

Nobody but an economist would think like this; and while this example is meant as a means to translate a very real phenomenon into the math-speak of regressions that academics use, he is seemingly unaware of the translation and thus the potential for error in even attempting it. In the world of high-credential universities, actual phenomenon must be converted into linear functions. That means that “gloom” has to be accounted for across several variables that can be each modeled in such a way that it makes sense to the mathematical versions of reality (and thus to economists who think I equations first).

Any non-indoctrinated non-statistician can immediately recognize the problems with thus thinking math-first. If you need to translate the real world into nonsensical linear mathematics before you can attempt to understand said world, then the bond market will really be a mystery to you.

In the world of the real, businesses don’t invest because their revenues don’t expand; end of story. Revenues aren’t expanding because businesses won’t hire no matter what the unemployment rate says; end of story. This was all, of course, one of the factors that quantitative easing was meant specifically to address – derived from the statistically modeled understanding of expectations rather than the actual conditions of them. The “wealth effect” was supposed to break the economy out of any gloom, as rising asset prices, especially the repeated and emphasized “record highs” of stocks, bonds, or anything in between, would surely negate any immediate “gloom” as it rolled over into expectations of an impeccable future.

Economic theory just does not allow for the possibility that asset prices, particularly stocks, are anything but completely efficient. But that is increasingly what we find, even in the math of orthodox construction. As noted earlier, the CBO has been keeping account of the withering failure of monetary policy in a manner that economists don’t want anyone to explore. Rewriting economic “potential” within these very mathematical functions serves to undermine the core of orthodox economics itself, especially since the CBO is not just proving the lack of recovery but rewriting most of the 21st century economy with it. zerohedge.com/news/2016-08-30/academic-tries-explain-yield-curve-says-gloom-irrational.