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Tuesday, 12 December 2017

20th century theory for 21st century problems

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

I RECALL A meeting I had a few years back with Karen Ward, the HSBC economist once called the “Black Widow” for appearing on TV and consistently warning that the property market was in bubble mode at a time when every Tom, Dick and Harry was trying to become an overnight property millionaire. Karen is in fact a charming and delightful young lady who once, when I asked her early one morning whether she had seen something in the Financial Times, replied that she never read the FT before forming her own opinion as she wanted to enter every day without being biased by others’ thinking.

I have tried to take that on board and although I log into the iPad FT app while standing in the kitchen with tea and toast in the morning, I only rarely look at the opinion columns. Wednesday is the only day when the rule is suspended as I look out for Martin Wolf, but especially for the always wise words of Professor John Kay, one of those people with whom I would love to have a “One-To-One”.

On August 23, Kay wrote a delightful piece on “Sex, lies and the pitfalls of overblown statistics”. As copying one man’s research is plagiarism, I shall desist from quoting too extensively, but he had me smiling when he opened by questioning the basis for the common statistical assertion that men think of sex every seven seconds. He then went on to question some of the statistical data we use when measuring our economies, but then promptly forgot to mention that 76% of people don’t believe the statistics they are presented with.

Most of the economic theory underlying market analysis and central banks’ monetary policy is drawn from the second half of the 20th century, the American century

While reading and smiling, I was reminded of a piece I wrote some time back in which I questioned not how we measure, but what we measure.

THE QUESTION IS whether the statistics we are using are the relevant ones. Most of the economic theory underlying market analysis and central banks’ monetary policy is drawn from the second half of the 20th century, the American century. Since the Nobel Prize for Economics was introduced in 1969, 47 out of 66 Nobel laureates have been either American or based in the United States.

Most of us learnt what we know in the 20th century and our thinking is definitely coloured by the likes of Milton Friedman and the monetarists. The 1973 oil shock and the ensuing inflationary recession has marred us, with monetary authorities obsessed with gearing their policy to managing inflation, although the issues facing the global economic edifice are now of a completely different nature.

Had Alan Greenspan and his peers not been so darned busy congratulating themselves on their magic touch in mastering inflation – despite all the evidence being that it was largely imported disinflation that kept headline CPI under control – we might not be in quite the mess in which we are now.

The low interest rate policy was part and parcel of what the Bank of England governor Mervyn King referred to as NICE – non-inflationary consistent expansion. Cheap money left, right and centre was tasty but poisonous.

It is now patently clear to all that the monetary authorities were looking the wrong way, but as the Bank of England would readily confirm, its hands were tied by the remit it was given. This was a true case of something working in practice but no one being sure whether it worked in theory too.

WE ARE NOW comfortably into the second decade of the 21st century, the Pacific century, but we are still sitting in the sand box playing with 20th century “Western” economic theory.

US Vice-President Joe Biden’s recent trip to China is a case in point. He spent his time trying to lecture the Chinese on what is right about his country, rather than seriously listening to their view on what might be wrong. The assertions of President Obama and Warren Buffett that the United States is triple A or quadruple A, respectively, confirm the regressive thinking that still grips the West.

We are married, for example, to the measure of GDP – which is, if one is brutally honest, a pretty spurious number, especially when used in the context of measuring ratios to debt and deficits. As someone wrote of service-industry-based GDP, how long can we live off selling insurance to each other?

Until we begin to record metrics that are relevant to the economic environment in which we now find ourselves, we will be left with a bunch of statistics that tell us what we might want to hear but don’t help us to move forward. Equally, the tools with which our monetary authorities are working have become blunted.

Recent market volatility confirms that what we are supposed to be using as a basis for market-related decisions no longer hits the mark. Perhaps Professor Kay will soon be writing a piece called “Sex, lies and relevant, usable statistics”, which outlines a proper and definable new economic paradigm, before boarding a plane to Stockholm in order to collect a Nobel Prize for Economics worth having.

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