Steve Keen’s predictions for 2010

Steve Keen (Australia’s top academic economist) takes a look back at 2009 – and squints at 2010 here on his blog.

Although I have the utmost respect for Keen as an economist and as a superb modeller, I can’t help myself.  I have to pick apart some of the comments he makes on his blog.  If I respected him less, I wouldn’t bother. 

I rarely comment on Paul Krugmaniac’s repetitive calls for the govt to spend itself into oblivion because (1) it’s so boringly repetitive and (2) my attention is easily distracted away from a quasi-socialist one-trick pony.

An interesting comparison could perhaps be made between my light-hearted, casual predictions and Keen’s more cautious, sober, somber tone on his blog.  He cares about his professional reputation, his academic legacy and so keeps trying.  I consider the whole “science” of economics a joke, so cannot bring myself to bother.

My predictions are contained here.  I trust even the casual reader can see that I treat both my predictions and economic predictions generally with a grain of salt (or perhaps – more accurately – with the respect I accord any fiat currency, which is to say none).

There are two reasons for this light-hearted disrespect for economic predictions. 

The first comes from the Austrian School insight that mathematical modelling of the ever-evolving market economy is futile and betrays a fundamentally naive view of market participants (that they can be mathematically modelled like rats) and a fundamentally egocentric view of bureaucrats (that they can predict what is inherently incapable of prediction).

Let me give you a few examples in the tradition of von Mises. 

Assume a very well-respected govt bureaucrat modelled the economy and made the “accurate” assessment that gold would double in the next five years.  Once this “prediction” got out into the market and other analysts reached the same conclusion, the price would likely rise quickly now – possibly even double now – because of the mere existence of the prediction.

How, in such a “recursive” modelling environment, do economists still treat modelling seriously? 

George Soros tries (ineffectually) to capture this concept with the term “reflexivity” – but I prefer the Austrian School’s characterisation of the economy as ever-evolving, and therefore not amenable to mathematical modelling at all.

Keynesians (and even Steve Keen) have a tendency to get lost in equations and don’t appreciate or understand the “heterogeneity of capital” – an Austrian concept meaning that investment cannot be combined and agglomerated into a total number.  The most important feature of entrepreneurship is the kind of investments made. 

The country that produces iPhones or eco-friendly resorts in Bhutan has “better” capital investment than the country that produces toxic cancer-causing asbestos or nuclear weapons commissioned by a paranoid central govt – even if the sum “total” of investment is triple in the latter country compared to the former.

Businessmen and investors seem to “get” this intuitively, but economists seem stuck in a rut, worrying pointlessly about numerical GDP and investment totals.  Who cares if we produce more or less nuclear weapons, toxic toys or cut down more rainforest?  It’s all “bad” investment if the price signals stimulating the investment are corrupted by bad govt policy or by corrupt banking practices. 

I tried to provide an insight into this “qualitative” approach here and here.  We are literally killing ourselves on bank and govt stimulated malinvestments.  It’s madness, but until we return to sound money there’s no way we can determine what investments are fundamentally sustainable and sound, and what investments are Ponzi-style speculative, wasteful, unsustainable malinvestments.

I’m much more concerned (terrified?) of the malinvestments, the qualitative “mistakes” that govts and fractional reserve banking stimulate and encourage, than the quantitative outcomes of these malinvestments.

Curiously Steve Keen recognises – even rails against – this clear monetary corruption, this insidious, incestuous link between govt and bankers, but doesn’t give up on his attempts to model the economy – despite this corruption.

I gave up years ago on modelling when I realised the markets were completely rigged.  This was proven in 2009. 

Keen recognises that the “logical” outcome for house prices in Australia in 2009 should have been a decline and identifies the corrupt govt’s manipulative and unsustainable doubling of the FHBG as the cause of the remarkable resilience in house prices – but doesn’t conclude that economic prediction is a complete waste of time in this corrupt environment, but rather tries again by analysing stockmarket trends from the Great Depression!

A few hypotheticals for Steve Keen to consider:

(1) If Helicopter Ben gave every single American $5 million in 2010, would Keen’s predictions still have validity? Answer – no.  I guarantee the stockmarket would not follow the trends set in the Great Depression regardless of American debt levels.  They may follow the German stockmarket trends during the Weimar Republic and face complete monetary collapse – but that’s a different story.

If this doesn’t seem a “reasonable” hypothetical, consider the trillions Ben already gave the bankers in 2008-2009.  By rights, the US bankers on Wall Street should either be in jail or homeless, dancing on the streets for food.  Instead they’re sipping champagne in Zurich and throwing wild parties in New York.

So much for “economic” modelling of bank profitability!

(2) If Robot Rudd gave every Australian family $1 million for home upgrades or renovations, I guarantee house prices would spike up – regardless of the level of mortgage debt in this God-forsaken country.

If this doesn’t seem a “reasonable” hypothetical, consider that the Rudd govt guaranteed every bank depost in Australia in 2008-2009, bought $8 billion in toxic RMBSs that the market wouldn’t touch, doubled the FHBG and gave subsidies to home improvements (insulation etc) in the billions.  If this is not deliberately and cynically distorting the “natural” market dynamics in the housing market, I don’t know what is!

The key issue is to ask:  If the govt tries to fight the natural adjustment process, what malinvestments will result from this distortion?  What will the consequences necessarily be?  It will be to create zombie banks, zombie companies, zombie govt employees, a zombie economy… and lots of useless economic activity that will be unsustainable in the long run.

Understandably, given the tension between his desire to provide accurate, reputation-enhancing predictions and his poor track record in 2009, Keen’s vision isn’t very clear on 2010. 

Curiously, in this particular post, he doesn’t explain why he’s going on a trek from Parliament House to Mt Kosciousko.  For those who don’t know, he lost a bet with Rory Robertson of Macquarie Bank over Australian house prices.  Keen predicted decline.  Robertson didn’t.  Robertson won.

Despite his brilliance as a modeller, he underestimated the madness and corruption of central government.  You can never “endogenise” the stupidity of government, the madness of Treasury, the influence of bankers, the venality of the political process.

Why doesn’t he give up on predictions entirely, admit the govt is corrupt and an agency of the big banks and state that he will return to making predictions once the govt turns away from corrupt, cynical manipulation of the economy?  Probably because he knows that the corrupt, cynical manipulation of the economy never stops – at least until complete Weimar Republic-style chaos ensues (the sooner the better in my view).

When Keen finally gets around to actually reading Rothbard and von Mises, I think he will become a much better economist.  And investor (he sold his house in 2009, and probably regrets the decision). 

I have a tip for Keen – buy farmland and gold and guns. 

Food and real money and protecting your family from predators and parasites never goes out of fashion.

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  1. Alice
    January 3, 2010 at 12:28 am

    You just might be interested in this historical artefact Karma:

    Senator Couzens (a liberal Michigan Republican): Did Goldman, Sachs and Company organise the Goldman Sachs Trading Corporation?

    Mr Sachs: Yes, sir.

    Senator Couzens: And it sold its stock to the public?

    Mr Sachs: A portion of it. The firm invested originally in 10% of the entire issue for the sum of $10,000,000.

    Senator Couzens: And the other 90% was sold to the public?

    Mr Sachs: Yes, sir.

    Senator Couzens: At what price?

    Mr Sachs: At 104. That is the old stock…..the stock was slit two for one.

    Senator Couzens: And what is the price of the stock now?

    Mr Sachs: Aprroximately 1 and 3/4.

    Source: Stock Exchange Practices, Hearings, April-June 1932, pp566-67

    As they started Kama, so they continued…and Govts dared to use our taxes to bail this scum out.

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