Good morning Pearly GRAY MATTERS
By Bill Bonner
"In extraordinarily sharp terms, U.S. Treasury Secretary
Paul H. O'Neill declared himself baffled by a recent
series of moves and countermoves by policymakers in
Tokyo aimed at reversing a plunge in the Japanese stock
market and reviving the nation's economy. O'Neill said
with evident asperity that, when he meets with his
Japanese counterpart, "one of my questions will be...
exactly what it is you're doing."
The Washington Post
Friday, Sept. 27, 2002
It was just 75 years ago today, according to the
International Herald Tribune, that a scientist in
Ithaca, N.Y. discovered that a woman's brain was not
necessarily inferior to that of a man. Dr. James W.
Papez, in a breakthrough worthy of Fleming or Bohr,
reported on his investigation into the brain of Mrs.
Helen S. Gardener.
We are suspicious from the get-go. For however much is
known about the inside of Ms. Gardener's brain cavity,
we know nothing about the rest of her. We do not know
the color of her eyes, or the sharpness of her wit. We
do not know if she was a good mother to her children or
a good wife to her husband...nor to what heights in the
business world she may have risen. We know nothing that
would allow us to form our own judgment about the
quality of her brain. All we know is what was revealed
by Dr. Papez and recorded in the International Herald
Tribune:
"Her brain reveals a wealth of cortical substance or
gray matter only equaled, but not exceeded, by the best
brains in the Cornell collection.."
Here at the Daily Reckoning, we find ourselves
disappointed by this report. It is a reminder of how
shabby the scientific process often is, and how major
theories often rest on pathetically little evidence.
What does it take to rank as one of the 'best brains' in
the Cornell collection? We don't know, of course, but we
imagine that Dr. Papez might have found a "wealth of
cortical substance" in almost any noggin he chose to
carve open. Even the leading film stars and central
bankers of the day might have yielded a respectable
portion of the gray glop, thereby casting the whole
hypothesis (gray matter = superior brain) into question.
But today's cogitation, we rush to reassure you, has as
little connection to brain power as a stock analyst.
Instead, our subject is theory.
The problem with theory, outside of mathematics and the
'hard' sciences, is that nature is very much alive. She
won't stand still. Trying to force a theory upon her is
like trying to argue with a smart woman...she squirms,
feints, and distracts you from your point so thoroughly
that, after a few minutes, you have forgotten what you
were talking about. A man will take your point, stand
his ground, and try to fight back, which at least gives
you the opportunity to return the blow. Not so a woman.
She will dodge...appear to change the subject...and
sneak in a rabbit punch when you're least expecting it.
We say this with no scientific backing and no prejudice.
One approach is as good as an another, for all we can
tell.
Maybe women would make better economists. Men are just
too blunt and dull-witted to appreciate the gray matters
of nature. They need things simplified, put into black-
or-white...idealized, like a cartoon drawing, reduced to
a caricature of its real self...or lifeless all
together. Contemporary American economists, for example,
seem to believe that they have only to adjust the price
of short-term loans - manipulating the Fed Funds rate -
in order to control the economy's moods. Cheap loans are
expected to produce roughly the same warm, accommodating
response in a souring economy as a bouquet of roses and
a box of Belgian chocolates provokes in a cross
mistress. Of course, they both work...for a while. But a
time inevitably comes when excesses, insults and
irritations have built up to the point where high
dudgeon cannot be overcome with low rates and Godiva. Au
contraire, the offering merely seems to make the problem
worse, by seeming to trivialize its causes.
Japan brought rates down to near-zero, and has kept them
there for half a decade. Despite the sweet cadeau,
Japan's investors, consumers and businessmen remain at
least in a state of low dudgeon - reluctant to spend,
invest, or borrow. Stocks - after nearly 13 years since
the bear market began - are still down 75% and seem
inclined to sink even further. Desperate, the Japanese
central bank has said it would resort to
'unconventional' solutions. Recently, it proposed the
adoption of unwanted and unloved securities. Then, it
suddenly seemed to reverse itself, saying it would leave
them out on the streets...in the hopes of teaching
investors a lesson.
O'Neill has promised not to criticize the Japanese, at
least not in public. But he could not help himself at
the IMF meeting. "Huh?" he seemed to say, right out
loud.
When he finally gets his answer, we suggest he pay
attention, not just for entertainment, but for
instruction. For, as we keep saying, the theories of
central banking science that guided the Bank of Japan
for the last 12 years are little different than those
that now provide a beacon for the Federal Reserve system
and its benighted chief. Mightn't the results be nearly
the same? And mightn't Paul O'Neill and Alan Greenspan
be looking, someday, for unconventional means to rouse
the national economy from a sulk?
"There is a disconnect between the economy and the stock
market," said an economist, voicing a common view. "The
economy is recovering. Investors seem to be over-
reacting to bad news..."
The Fed cut 475 basis points from short term rates last
year. Hardly a month went by without another delivery
from FTD and the Chocolate Express. Consumers continued
to spend. Homeowners continued to borrow. But stocks
sank anyway...and continue to go down.
Possibly, investors are acting irrationally. But
possibly they know something - that the economists'
theory is as shallow as Dr. Papez's view of Ms.
Gardener's brain; whatever she was, when she was still
among the quick, Ms. Gardener must have been a lot more
complex and interesting that the slimy goo in her cold
skull.
If the economy would drop dead, economists might get a
chance to open it up and poke around. Maybe they would
find out something. As it is, they seem almost
uninterested. After 475 basis points, and more than 18
months since the rate cuts began, a docile economy
should be headed in the direction the economists want -
towards faster rates of growth, higher profits and
higher asset prices.
It is not. Nothing has worked at it should have. Last
year's recession did not do what it was supposed to do.
Consumers did not stop borrowing; their debt levels went
up instead. Nor did they stop spending so they could
build up demand for the breakout later. Stocks did not
go down to low levels...so they could be bid up in the
following boom. Instead of selling stocks, people bought
them.
Then, the recovery proved as big a failure as the
recession. Factories did not rush to hire back workers.
Demand did not pick up. Profits and stock prices did not
rise; they fell.
Theories are useful because they allow you to predict
what will happen in a given set of circumstances, even
without ever having experienced it yourself. If you
forget your telephone number, for example, a good
economist can estimate it for you. But none of the
predictions made by America's leading economists and
analysts have come true.
What gives? Remarkably, almost no one asks.
But the inquiring minds who read the Daily Reckoning
want an answer...
We will try to come up with one - for Wednesday.
Bill Bonner |
