Thursday, November 16, 2006

Prevention, preparation or cure: from medicine to money

God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.
Reinhold Niebuhr

Patient: Doctor, it hurts when I raise my arm over my head
Doctor: Well, don't do that

One of the differences between Chinese and Western medicine (although the gap is narrowing quickly) lies in the approach to disease. Western medicine tends to focus on cures while Chinese medicine tends to focus on prevention. This western tendency to assume that cures are possible can be found in other schools of thought, such as climate change and economic policy.

A traditional Chinese doctor is far more likely to go on a house call than his western counterpart, because the Chinese doctor wants to see how you live. He wants to know what you did to get yourself in the state of dis-ease and get you to stop doing it.

A western doctor will spend far less time figuring out how the disease arose and far more time classifying your disease so as to prescribe a cure.

*note: the above are generalizations, there are western doctors who prefer a holistic approach and many new Chinese doctors who have adopted the curative attitude.

The advances of modern medicine, which are admittedly substantial, have, I believe, upset the balance in thought as to what can be changed and what can't. No disease is considered incurable, if such a condition exists today with respect to certain diseases, it is thought to be temporary. This expansion of the possible is not limited to medicine.

But some conditions humans find themselves in cannot be cured. In these circumstances, at best one can either stop doing the things that cause distress and/or prepare to live with the condition.

I often wonder if climate change will prove to be one of those things we cannot change. The debate, in my understanding, seems to center on whether such is occurring and if so, whether to impose a cure in the form of reduced carbon dioxide emissions.

Those who find that "pill" distasteful argue, in a wonderful show of reverse reasoning, that there is no disease. It would be akin to a man telling his doctor, "Because I don't want to go on chemo-therapy I don't have cancer."

On the other side of the issue, those who believe the globe is getting hotter argue that we need to reduce carbon dioxide emissions, assuming that the imputed relationship is causal, not coincident or even dependent. Faith in the efficacy of the pill is strong in these quarters. These people want to fight global warming.

I prefer a preparatory approach to the issue. If the globe is warming and, inter alia, sea levels are expected to rise, don't buy that beach front property.

Faith in the cure is even stronger in financial circles, particularly in the US. The decline in risk premiums from decades ago is evidence that faith in the monetary and fiscal authorities to cure economic distress runs strong. Discontinuities are thought to be things of the past.

This faith seems very unfounded to me, particularly in light of debates which arose during a recent ECB (European Central Bank) conference on the role of money in monetary policy. According to Fed Chairman, Ben Bernanke, even though Volcker's "monetarist experiment" to control inflation was successful and ushered in the low-inflation regime that the United States has enjoyed since, due to difficulties in measurement, brought about by deregulation, financial innovation, and other factors, that approach has been largely set aside.

In its place...well you got me there. Expectations management would be my guess, and apparently the guess of some at the conference. Mr. Bernanke was asked about the role of inflation expectations in Fed policy. He responded; "We do look at expectations. We think it's informative in a number of ways. But we certainly don't substitute expectations data for more fundamental analysis of inflation."

This seems a reasonable response until you recall his speech which stated that the Fed doesn't really look at money, presumably a more fundamental analysis of the issue. According to ECB President Jean-Claude Trichet, a model of monetary policy that includes no role for money is incomplete. In a recent opinion piece for the FT Mr. Trichet quoted Friedrich Hayek: It is self-contradictory to discuss a process [inflation] which could not take place without money and at the same time to assume that money is absent or has no effect. I'll second that.

I wonder if the Fed will begin serving freedom fries?

In financial circles, the US economy is thought by many to be bullet-proof, at least judging by market prices. Yet, in European economic policy circles, the US approach is considered unwise, much as Europeans policy makers thought US foreign policy was unwise. I guess the Europeans are more into prevention and less enamored of cures than we are.

Returning to the notion of expectations management, and in closing, Mr. Bernanke ended his speech on what seemed to me an ominous note: Although a heavy reliance on monetary aggregates as a guide to policy would seem to be unwise in the U.S. context, money growth may still contain important information about future economic developments.

Hmmm...a heavy reliance on monetary aggregates as a guide to policy would seem to be unwise in the U.S. context. Why would it be unwise? Perhaps because it would be increasingly difficult to manage expectations if the link between money and inflation was more central in Fed policy making, in the US context where money (and money substitutes) supply growth has been very rapid.

Better then to talk tough about fighting inflation, as part of an inflation expectation management strategy. Did you see the latest PPI and CPI figures?


the stranger said...

Interesting comment on the global warming; I was looking at a chart that showed co2 was higher than in (I forget) half a million years or so; then pondering that the last ice (or pole shift) ended 12,000 years ago. Maybe it’s evidence that it isn’t the cause? Climate change seems real enough, serious too, but I wonder if it has more to due with solar activity and ocean volcanism. Oddly enough these likely candidates are overlooked when I read about global warming. Anyway, your comment indicated you may be asking these questions yourself. ...thanks for writing.