Editor’s note: Bill is out of reach on the ranch. So today, we dip into the archives to bring you a classic essay that explains how the PhD economists got us into the mess we’re mired in today. You’ll find it’s just as poignant now as when it was written five years ago.
They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management.
They failed to see it for what it was.
Then, when trouble came, they made it worse.
But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.
“The Greatest Depression that could so easily have happened in 2009 but did not is the tribute that the world owes to economics.” Wrote Arvind Subramanian in The Financial Times.
We were lost from the get-go, trying to interpret the sentence. It is as tangled and puerile as the staggering conceit behind it. Then, Mr. Subramanian sets up the stage props:
In 2008, as the global financial crisis unfolded, the reputation of economics as a discipline and economists as useful policy practitioners seemed to be irredeemably sunk. Queen Elizabeth captured the mood when she asked pointedly why no one (in particular economists) had spotted the crisis coming. And there is no doubt that, notwithstanding the few Cassandras who had correctly prophesied gloom and doom, the profession had failed colossally…
He then brushes off the Queen’s very sensible question:
But crises will always happen, and even if there is a depressing periodicity to them as Professors Reinhart and Rogoff have catalogued, their timing, form, and provenance will elude prognostication.
Of course, the record doesn’t show that the crisis eluded prognostication; any dope could have seen it coming. But the prognosticators who had contributed so mightily to the crisis had blinded themselves with their own claptrap. Still, Mr. Subramanian figures that they “vindicated” the profession in the way they responded to the crisis.
On monetary policy, Bernanke was true to the word he gave to Milton Friedman on the occasion of his 90th birthday: ‘Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Bernanke, the pre-eminent student of the Great Depression, found conventional and some very unconventional ways of not doing ‘it’ again. At the peak of his interventions, the U.S. Fed came to resemble the Soviet Gosbank, more a micro-allocator of credit than a steward of macroeconomic policy.
It probably wasn’t the point he intended to make, but the Fed does resemble the Soviet era Gosbank – manipulating, meddling, and micro-managing the economy toward destruction.
Meanwhile, Congress is doing some Soviet style management too; it is now owner of the nation’s largest automobile company and its largest insurance business: “They took their cue from the writings of the academic scribbler of yore – Lord Keynes – and provided massive public demand for goods and services where private demand had collapsed…”
We were still gasping for air when, on the 30th of December, columnist Martin Wolf called upon Keynes’ ghost again. He, too, shuddered to think how horrible things would have been if the financial authorities had not taken resolute action:
We could not, in such times, even take the survival of civilization itself for granted. Never before had I felt more strongly the force of John Maynard Keynes’ toast ‘to the economists – who are the trustees, not of civilization, but of the possibility of civilization.’
Is there any doubt that Keynes was a scalawag? Civilization flourished for thousands of years before anyone made a living as an economist. Crises came and went.
In the 19th century, for example, there were panics followed by depressions in 1819, 1837, 1857, 1873, and 1893. Not one of the depressions seemed worthy of the “great” modifier. Hundreds of banks failed. Civilization didn’t seem to care. The rich and powerful took their lumps along with everyone else; most people enjoyed watching them go down. Business went on.
In 1913, on Christmas Eve, Congress passed the Federal Reserve Act, setting up America’s central bank. Only then did economists get their hands on the economy’s throat. The dollar was worth about the same thing it had been worth 100 years before.
Now, almost a hundred years later, it is worth only 3 cents. And only 16 years after economists took their positions at the Federal Reserve came a depression worse than anything the nation had ever seen – at least, it was worse after government economists finished with it.
The Great Depression may have been an accident, but the debasement of the dollar certainly was not. It was a matter of policy. Economists, led by Keynes, had the idea that they could spur the economy forward by creating phantom demand – in the form of additional units of purchasing power. The gold standard stood in the way; it was abandoned like a bad neighborhood.
First, temporarily, then partially, then, in 1971, completely. The first consumer credit boom came in the ’20s… leading to the Great Depression. By the 1980s, 50 years later, Americans had lost their residual fear of debt. Consumer credit boomed again.
Then it bubbled. Economists didn’t understand what was going on. They rarely do. But they had created a hundred-year flood of consumer debt. Now, they congratulate themselves; households sink… but civilization floats.
JEFF BROWN, EDITOR, EXPONENTIAL TECH INVESTOR
A young Luke Skywalker was able to view a holographic image beamed by his trusty robotic companion, R2-D2, of Princess Leia in distress.
That was nearly 40 years ago…
Up until recently, holographic technology required large, bulky equipment, including expensive computing and display systems. However, improvements in semiconductor and optical technologies have enhanced quality, lowered cost, and given rise to highly portable holographic technology.
Microsoft (MSFT) recently released a new holographic product called the HoloLens. Today, you can purchase a developer’s version for $3,000. Now that the platform is ready, software developers can design applications and programs for games, entertainment, education, and holographic communications (i.e., the ability to be “present” remotely – a highly advanced form of video conferencing).
Imagine sitting down in your chair at home, putting on your holographic goggles, and joining a meeting in Tokyo. Your experience and participation in the meeting would be almost as if you were actually there – for you and for the other participants. Yet, you would not have to leave your home or office nor endure the hassle of flying halfway around the world… no jet-lag, either.
Another interesting company I’m following is called Meta. It recently announced the release of its Meta 2 Development Kit, which costs $949. The technology is designed to work and interact with 3D images, making it an important tool for accelerated learning, design, analysis, and collaboration.
Still in development, but no less exciting, is a holographic display technology from a stealthy startup called Leia. What sets Leia apart is that its technology is the only one that does not require special lenses or goggles to view holographic images. Better yet, Leia’s display technology is being designed for small screens, including ones tiny enough to fit in the dashboard of your car or the display on your smartphone.
Now that we have affordable development platforms and inexpensive consumer versions, all kinds of exciting applications are not far behind.
Imagine how mapping and tourism will change when you can walk through holographic cities before ever traveling there… Imagine how communications will change when, instead of Facetiming with a friend, a real-time, 3D image of him will be sitting right next to you… Imagine how entertainment will change when a nearly real version of your favorite singers can strut across hundreds of stages around the world simultaneously…
With all that on tap, there will be many interesting opportunities to invest in hardware and software companies in this space – aside from a large one like Microsoft – during the next few years.
Editor’s Note: Jeff recently discovered a small company that promises to revolutionize medicine. It has pioneered a technology that can fix individual genes, repairing a person’s DNA piece by piece. It aims to eradicate the more than 6,000 debilitating and sometimes fatal genetic diseases in the world. It IPO’d two months ago, and it’s already up more than 125%. Read on here…
Now Is the Time to Buy Gold… Here’s Why
Buying gold right now is one of the smartest investing decisions you can make. And Bill’s colleague Porter Stansberry explains how it’s a fool proof way to boost your returns and lower your risk.
Saudi Government’s Link to 9/11 Attacks Revealed
Evidence of a possible link between the Saudi government and the September 11 attacks has emerged… just as President Barack Obama arrives in Saudi Arabia to smooth relations.
A private firm is taking over security at Florida’s Punta Gorda Airport. And it is part of a wider trend. Private security firms now monitor at least 22 airports in major cities such as San Francisco and Kansas City.
Great feedback today on yesterday’s Diary, “A Tearful Farewell at the Ranch.”
Please share with Mr. Bonner how much I love hearing about the ranch and the people. Really makes me want to visit such wonderful warm people. Please keep the news coming because the rains will return.— James H.
Nice story. You don’t mention his age, but I can’t help but wonder how poor old Jorge and his wife Maria will manage in town with all the neighbors, traffic, airplanes, etc. after being on the ranch for so long. I’m tipping they miss the wide open spaces already… even if it is in severe drought.
As an almost ready to retire person (only a couple of weeks away) I’m looking forward to my retirement and have much empathy for Jorge and his wife. At least we are not in drought around here.— Richard H.
I am a 64-year-old American living the good life in rural Costa Rica.
I would highly encourage Bill to take the time to study Spanish intensively. I earned a degree in it with the GI bill over 40 years ago and speak it fluently.
This didn’t just enhance my life in Latin America… it made it something completely different – magical if you will.
Forget the argument that you are too old…. You are not too old. Just do it.— Curtis C.
Thanks, Bill, for your kindness to Jorge. He needs the land, the cattle and his horse(s). He will die the way he lives: with his boots on.— Cheryl L.
Bill should set aside some land with a house for Jorge and his wife to live on his property and give him a job of enhancing the replacements ability.— Joe M.
Next Thursday, Bill will begin investing $5 million of his family trust’s money in Chris Mayer’s new stock recommendations.
Let Bill tell you, in his own words, why it’s the perfect fit for him… and for you. Watch here now.