Currency Wars_ The Making of the Next Global Crisis - James Rickards [104]
Unfortunately, behavioral economics has been embraced by policy makers to manipulate rather than illuminate behavior based on dubious premises about their superior wisdom. Bernanke’s campaign to raise inflationary “expectations” by printing money and devaluing the dollar while holding rates low is the boldest contemporary version of such manipulation, yet there are others. Orchestrated propaganda campaigns have involved off-the-record meetings of corporate CEOs with business reporters requesting that they apply a more favorable spin to business news. These attempted manipulations have their absurd side, as with the phrase “green shoots” repeated ad nauseam by cable TV cheerleaders in the spring of 2009 at a time when America was losing millions of jobs. Tim Geithner’s self-proclaimed “Recovery Summer” in 2010 is another example—that summer came and went with no recovery at all for the forty-four million on food stamps. These are all examples of what Kahneman called “framing” an issue to tilt the odds in favor of a certain result.
What Bernanke, Geithner and like-minded behavioralists in policy positions fail to see is something Merton might have easily grasped—the positive feedback effect that arises from framing without substance. If the economy is actually doing well, the message requires no framing and the facts will speak for themselves, albeit with a lag. Conversely, when reality consists of collapsing currencies, failed banks and insolvent sovereigns, talk about green shoots has at best a limited and temporary effect. The longer-term effect is a complete loss of trust by the public. Once the framing card has been played enough times without results, citizens will reflexively disbelieve everything officials say on the subject of economic growth even to the point of remaining cautious if things actually do improve. This does not represent a failure of behavioral economics so much as its misuse by policy makers.
Behavioral economics possesses powerful tools and can offer superb insights despite occasional misuse. It is at its best when used to answer questions rather than force results. Exploration of the paradox of Keynesianism is one possibly fruitful area of behavioral economic research with potential to mitigate the currency wars. Keynesianism was proposed in part to overcome the paradox of thrift. Keynes pointed out that in times of economic distress an individual may respond by reducing spending and increasing savings. However, if everyone does the same thing, distress becomes even worse because aggregate demand is destroyed, which can cause businesses to close and unemployment to rise. Keynesian-style government spending was thought to replace this shortage of private spending. Today government spending has grown so large and sovereign debt burdens so great that citizens rightly expect that some combination of inflation, higher taxation and default will be required to reconcile the debt burden with the means available to pay it. Government spending, far from stimulating more spending, actually makes the debt burden worse and may increase this private propensity to save. Here is a conundrum that behavioral economists seem well suited to explore. The result may be the discovery that short-term government austerity brightens long-run economic prospects by increasing confidence and the propensity to spend.
Complexity Theory
Our definition of complex systems included spontaneous organization, unpredictability, the need for exponentially greater energy inputs and the potential for catastrophic collapse. Another way to understand complexity is to contrast it with that which is merely complicated. A Swiss watch may be complicated, but it is not complex. The number and size of various gears, springs, jewels, stems and casings make it complicated. Yet the parts do not communicate with one another. They touch but do not interact. One gear does not enlarge