Facts are stupid until brought into connection with some general law. Louis Agassiz
The FT's Tony Jackson recently published an essay- Commodities bull story relies heavily on guesswork - which epitomized, for me, the current problems of mass media affected public discourse in general and its economic subset specifically. The problem, it seems to me, is that much of the public discourse is baseless- indeed, so baseless that the idea of a theoretical base upon which to build an argument is ridiculed.
In my last post I opened with a digression I'll return to now- back when Adam Smith wrote the Wealth of Nations the preferred phrase was "under that head", meaning belief structure, but these days "belief" itself has a negative connotation...now we "know" things...which is to write, are immersed in the metaphysics, or in the patois of the Grateful Dead, have drunk the Kool Aid. Back when Adam Smith was writing, one of his Scottish fellows, David Hume, wrote a polemic on reason which has yet, in my view, to be successfully challenged. His argument was that knowledge, properly defined, is really justified, true belief, and reason, the analysis of cause and effect, is based more on faith than fact. In essence he took the post hoc, ergo propter hoc fallacy to its ultimate conclusion.
This argument flowed from Descartes' imagined descent into a world of manufactured perceptions so ably displayed in the film, The Matrix. How, Descartes asked, can we be sure that the world we see, hear, sell, feel and taste really exists? How can we know we aren't, as portrayed in The Matrix, just pods plugged into a virtual reality machine?
The Newtonian God- the God who made a clock-like universe, wound it, and withdrew- died a long time ago. This is what Nietzsche meant and this is the God who is being observed. Marshall McLuhan
Hume's response was that we can't ever be sure. We are, by virtue of language based consciousness, creatures of faith, or so I see things. Natural scientists must believe in a shared material universe with unchanging laws of reaction in order to try and discern them in communicable form. The Newtonian revolution shattered the world view wherein God could alter the universe at a whim and left us with the stable law universe-view upon which modern science was built.
Lately, though, the notion that man can change the laws on his whim is, more and more, beginning to creep into public scientific meditations- Baudrillard's hyper-reality- the origins of baseless thought.
Promoters of baseless thinking waste no time laying out theoretical underpinnings. They merely grab a few anecdotal facts and craft a new world view which comports with the argument du jour (a world view, mind you, with a lifespan of a fruit fly, or at least until a contrary world view is needed to write the next article), all the while being ignorant of their fickle philosophical grounding.
Consider the article from Tony Jackson which contains this collections of facts:
1) The Aden sisters correctly forecasted a rise in the Gold price to $850 and a subsequent fall to $300 in the early 80s.
2) their next forecast for a rise to $4000 did not pan out
3) Since the start of this year, the gold price has risen 15 per cent, while the TIPS spread has not risen at all.
4) Since the start of last year gold is up some 40 per cent, and the TIPS spread has actually fallen
5) the base metals industry is crucially exposed to time-lags. Both supply and demand are inelastic and lead times are long
6) It [China] also consumes about three times as much base metals per unit of GDP as an advanced economy – for the meantime, anyway
I agree with his facts, and taking my cue from Daniel Patrick Moynihan- Everyone is entitled to their own opinion, but not to their own facts, I'll focus on the opinions he crafts from them.
He takes facts 1 and 2 and opines that such thinking was weird. Further he argues that today, unlike the early 80s, people go by logic and fundamentals.
The word "logic" these days has taken on the connotation of truth. Yet, in its classical sense, the word suggests no such thing. It is possible to construct a logical argument that is entirely untrue if the assumptions on which the argument is based are false. The study of logic and the study of truth are two different fields of research.
On his point of fundamentals I defy my 3 (now 4 that I got posted on Itulip) readers to show me a fundamental economic theory in Jackson's article. The article has facts, but the fundamental theory, as best I can surmise, is that thinking the price of commodities will rise further is weird and based on guesswork, as opposed to his views, I suspect- lol.
Facts 3 and 4 are ones I have cited in the past, but in support of a very different conclusion, which he glosses over with the following, if we take the yield on TIPS to be real. If one assumes that the yield on TIPS is "real" by which I suspect he means, along the lines of the "efficient market theory" of Eugene Fama, that the price reflects all known information, then the rising price of Gold seems anomalous. If one, and I'm in this camp, doesn't believe Fama's theory, then the price of TIPS could be what's wrong, in much the same way that the price of Tech stocks was very wrong, for a long time.
Facts 5 and 6 seem to me to refute his argument. If, in the base metals industry, both supply and demand are inelastic and lead times are long, and if China currently consumes 3 times the volume of base metals per $ of GDP and given the unmentioned fact that China's GDP shows no signs of slowing, then the current period of rising commodity prices may well be with us for a while longer.
He gets around this potential problem by suggesting, without basis, that this time, the cycle could prove more acute. This out of the blue comment was presaged by the, oft-used during the Tech Boom, comment, we are in new economic territory.
This last comment is the ultimate end of baseless arguments- we are in a new world, about which we know nothing. Or, as I see it, since we don't like the ends to which current theories suggest we are heading, we will throw out that theory.
My own theory is that the Aden sisters didn't account for the effects of a shift from a fairly autarkic model to a very open capital and trade account model which provided an outlet for all the $s we were creating. But with the world no longer in debt to the US and needing $s, and no longer worried about having insufficient $ reserves to stave off a currency crisis, this game has run its course. If the CBs hadn't done some heavy lifting over the past few years, $ based inflation in commodity prices would be, I suspect, higher than it has been.
In my view, the current rise is $ based commodity prices is far from over for a few main reasons:
1) War tends to drive economies towards greater autarky, which, due to the creation of redundancies, tends to be inflationary
2) The great engine of Capitalism has been unleashed in the most populous region in the world, Asia, and the most populous country, China. Once opened this box can only be caused with great distress. We have about as much chance of stopping China's growth as Great Britain would have had, if they had wished to stop US growth while we industrialized and urbanized.
3) with financial leverage at extremes rarely seen, the political will to remove the punch bowl of monetization will be difficult if not impossible to find.
This view itself is based on the belief that there is something to the quantity theory of money, which is not to argue that there are qualitative aspects worth noting.
But, as William James would have put it, we'll just have to wait and see whose view, in the event, has a cash value. In the modern era, Warren Buffet summed it up well, it's only when the tide goes out that you find out who's been swimming naked.
We'll see who needs a towel.