More on advocacy versus forecasting at Credit Writedowns
This is a quick note. About a year ago I told you there would be less policy advocacy and more policy forecasting at Credit Writedowns. It was clear to me then and it is yet more clear now that policy makers are wedded to their previously chosen set of policy remedies. In Europe, for example, I wouldn’t expect the ECB to step in as a lender of last resort unless things are on the verge of absolute collapse. How did I put it last week: “I expect the ECB to dither. The cognitive dissonance is too large.” That’s it exactly.
But should the ECB step in? In my post running through Italian default scenarios, I told you that’s really a meaningless question. Let me put it a different way: why would you give a flying leap – you know I wanted to use a different word, right? Why would you care if the ECB should do anything? Does that help you make money or help you keep your job? I’m not a European policy maker and I imagine neither are you. Put simply: it doesn’t matter what the ECB should do. It matters what they will do. See the difference?
Look, everyone gets hot under the collar about these thing, talking in very moralising terms.
- “The Greeks and Italians are profligate, lazy moochers, sponging off of us.” or
- “The Germans and the Dutch are cunning little devils, free riding off of our weak currency.”
You know the arguments. I don’t give a damn about any of that any more. It means nothing to my bottom line whether Greeks are deficit-loving euro sponges or Germans are mercantilist euro free riders. What matters is how the political economy of all of this plays out on the real economy and the financial markets.
Yeah, I have deficit fatigue, bailout fatigue, crisis fatigue – all of that. So what? The point has to be to look beyond the emotion, the ideology, and the national pride and figure out how this affects you and then protect yourself against downside scenarios. Hope for the best but plan for the worst!
What I have been telling you for nigh on four years now is that this is no garden variety recession or crisis. This is the big cahuna. And I think that means deficit fatigue, bailout fatigue, crisis fatigue – all of that – will enter the picture. Emotion, ideology, and national pride will affect policy choices, 100% guaranteed. And this will cause policy errors, gaffes of monumental proportions. That’s what an epic crisis means; it means forcing policy makers to get it right again and again and again or face economic Armageddon.
As the euro crisis has proceeded, I have been cognizant of this. Yet, I have believed that fear of economic collapse would continue to produce a pro-reflationary response – not that this response would be optimal, by the way. However, as we near the prospect of that collapse, the potential for crucial policy errors – ones that create deadweight loss and deflate the economy the most – increases and therefore it behoves us to play out the Black Swan scenarios. So that’s what I have started to do.
I have some additional thoughts on this score for a later date. I should add that reflating the economy isn’t necessarily the best economic policy – particularly if this reflation increases credit instead of writing it down. Credit Writedowns is the name of this site for a reason. So I will not ‘advocating’ reflationary policies for reflation sake. All I care about now is writing about how not to get caught out – avoiding monumental downside risks in investing and business decisions by getting the economics and the likely outcomes right and avoiding getting overly invested in ideology and morality plays. We are now in a permanent risk-off environment. Everything else follows from that. If you see me getting emotional and letting my moralising and my ‘feelings’ get in the way of my analysis, I hereby give you the permission to slap me upside the head to knock some sense into me. Anyway, that’s my piece.
We are still in fundraising mode here though! Thank you to everyone who has donated to the effort. I count 30 donors already! Very exciting. Go. GO. Go. Please keep it up. By the way, changes that have already been made since this began: we now have a server twice as powerful as the old one and the feed is now full feed instead of summary feed. Many more changes are to come with your help.
P.S> – Just because i say I want to avoid morality plays clouding my forecasting ability, doesn’t mean they won’t. This is where your knocking sense into comes into play and you can feel free to let loose in the comments.