Cassandra Talks Economics

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The last time TLR talked with Cassandra about economics was in September 2020 when she correctly conveyed a short-term bearish prophesy forecast for stocks (here).  The Dow Jones Industrial Average (DJIA) from September-October promptly declined from 29,100 to 26,520 …, before roaring back to close at over 34,700 this past Friday.  Cassandra thereafter ventured a prediction on American politics (here), correctly cautioning that President Trump wouldn’t accept a Presidential election loss … and that he would take steps to reverse one.  Even with these insightful predictions, Cassandra does not claim clairvoyance.  The legal disclaimer she’s provided to TLR asserts only an ability to foresee future direction – what might happen as a function or consequence of intersecting trends –, and not specific events or dates.  She is an oracle, not a psychic.  Her fame owes its origins not to any 21st Century forecasts, but to her call concerning the fall of Troy.  As readers of The Iliad know, when the Greeks abandoned their siege of Troy, they left behind a giant wooden horse.  The Trojans brought the horse into the city as a trophy and, to celebrate their apparent victory, began partying like there was no tomorrow (which, as it turned out, was right), unaware that Odysseus and his men were hiding inside.  When night fell, Odysseus and his men climbed out, killed the guards at the city’s gates and let in the Greek army.  Troy was destroyed and its people slaughtered.  Cassandra – the young priestess who the Greek god Apollo mythically had granted the power to accurately prophesize the future but cursed so that her prophesies would not be believed – had warned against exactly those events.  Her countrymen had ignored her pleas.  They’d thought her crazy.  Cassandra was right then …, and has been proven right numerous times since …, which is why TLR has invited Cassandra to again share her insights, today about America’s economy and markets.

TL Realist:                Good morning, Cassandra.  It’s been more than six months since we last spoke and Americans once again are eager to hear your views.
Cassandra:         Thank you, Mr. Realist.  It’s my pleasure.

TL Realist:                Let’s first remind readers about how you came to take an interest in economics.  You are, after all, a soothsayer rather than an economist.
Cassandra:         You are drawing an invalid distinction, Mr. Realist.  I am an interpreter of portents.  The modern word for “portents” is “data.”  Your readers therefore should view me as a data filterer … someone with skills similar to, though more insightful discerning than, your modern economists and analysts.  Although I gained notoriety from my foresight during the siege of Troy, the process of sifting data then was no different from that process in the 21st Century.  In ancient Troy, I relied on my observations, the only data available at the time.  Laocoon had expressed grave concerns about the Trojan Horse.  He was quickly silenced by Athena – she gouged out his eyes and summoned giant snakes to kill him.  I understood that to be a sign that something was amiss.  However, it was only after statues started weeping, blood began running down walls, buildings started shrieking and birds began talking that I sounded the alarm, a warning that the people of Troy ignored.  One looks for such signs when ordering priorities in the data-sifting process.

TL Realist (laughing):            Nothing like that is happening today, Cassandra.  In the 21st Century, those types of signs most certainly would be acted upon.
Cassandra:         Would they, Mr. Realist?  For me, today’s portents are just as clear.

TL Realist:            Let’s hold that thought for a moment, Cassandra, and focus on your method for prioritizing data.  With today’s times being more complex than they were in ancient Troy – there is, after all, an enormous quantity of data bombarding each of us –, how are you able to sort what is important, what will be impactful, from information that is largely irrelevant?
Cassandra:         That’s an excellent question, Mr. Realist.  My abilities rest on combining an understanding of human psychology, economics, and nature, as well as having lived through countless economic cycles.  I find the historical echoes, the rhyming, the large and small repetitions and deviations, intensely revealing.  That is my focus.

TL Realist:                It no doubt helps that Apollo granted you the power to accurately prophesize the future as well.
Cassandra:         Yes, that too is true, Mr. Realist.

TL Realist:                Many modern soothsayers have been predicting runaway inflation that will soon decimate America’s economy and stock market prices.  I understand that you have a different forecast, Cassandra.  Would you care to elaborate?
Cassandra (smiling):        I have been reading your commentaries, Mr. Realist.  You have attempted to balance the views of those who foresee continuing deflation against those inflationists who are relying on recent data concerning the supply chain disruptions of Covid-19 and de-globalization together with the wage impact of government labor policies [ED. NOTE:  found here and here].  In doing so, you have attempted to bridge what some have labeled “the economic divide” between bulls and bears, optimists and pessimists.  That is a fruitless task, Mr. Realist.  There is only one right answer to any economic question.  The fact is that the current spate of inflationary data is transient.  Your Mr. Powell has spoken accurately, Mr. Realist.  Inflation in the traditional sense is dead.  It will remain moribund for years.

TL Realist:                What do you mean, Cassandra, by “in the traditional sense”?
Cassandra:         You, among others, have relied on Milton Friedman’s definition of inflation [ED. NOTE:  here] as arising from the more rapid increase in the quantity of money than in output.  That traditional definition no longer has validity.  As so many have noted, though without full comprehension, government money-printing has been in overdrive for the past 12 years – the increase in the quantity of money has overwhelmed output –, and yet, despite the very best efforts of Central Bankers, there has been no inflation.  That is telling us that this economic cycle is different from prior ones [ED. NOTE:  a subject discussed by TLR here, though with a perspective different from Cassandra’s].  The definitions of GDP and of productivity have changed in truly momentous ways.  The pool of usable labor is shrinking [ED. NOTE:  for doubters, the declining participation rate can be found here] with the global workforce on the verge of shrinking as well …, changes that are being exacerbated by technologically-driven accelerating automation.  An aging global population, artificial intelligence and revolutions in production, technology and biotechnology have permanently altered economies … and traditional economic models.  The definition of money as well as the velocity at which money changes hands has changed …, or haven’t your economists noticed?  Past economic cycles therefore have limited applicability …, much as both Athens’ and Troy’s military strategies are largely irrelevant today.

TL Realist:                If I’m understanding you correctly, Cassandra, you’re saying that the economic cycle understood by economists and experienced for the past several hundred years … has been repealed suspended.  That’s quite a radical statement!
Cassandra:         Traditional analyses clearly are not working, Mr. Realist.  They are not likely to work in the current economic environment.  It doesn’t require a Cassandra to tell you that.  Among other things, virtually all economists have derided Modern Monetary Theory, which has been successfully practiced by Japan for the past three decades and by America for more than a decade.  Doesn’t that alone augur well for its continued success?  Many of those same economists have declared that Quantitative Easing, limitless money-printing, and massive deficits will decimate America’s economy.  If true, that already should have happened.  There has been no such decimation.  That’s meaningful …, and yet analysts and economists insist that traditional economic theory continues to hold.

TL Realist:                Yours is a provocative perspective, Cassandra.  However, we all know that money-printing cannot continue forever.  Excess necessarily incurs consequences.  “Forever” simply is an impossibility.
Cassandra:         The world has changed, Mr. Realist.  Inflation is not simply a Milton Friedman construct.  For there to be inflation, people must expect it.  They must believe in it … and that belief must become embedded.  Among other things, the evolution of social media – cultism as you have labeled it [ED. NOTE:  found in TLR  here and here] – makes it exceedingly difficult for a sufficient percentage of the population to believe anything.  With Mr. Powell and your Federal Reserve having gained a near-religious following by promising to do whatever it takes to control inflation …, and with the American public sold on the benefits of deficit spending and free-money-without-consequences for the foreseeable future, there is little risk of inflationary expectations taking hold.

TL Realist:                So, to paraphrase your view, Cassandra, rather than inflation being “always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” you would define it as being “always and everywhere a public perception that can be manipulated by government propaganda irrespective of the quantity of money in circulation.”  Is that correct?
Cassandra:         That was nicely put, Mr. Realist.  It is.

TL Realist:                So you reject the concerns raised by successful businessmen like Carl Icahn who has said that “inflation already exists [and] will eventually cause higher interest rates and a major correction in the market”?  He’s wrong?
Cassandra (smiling):        He IS wrong, Mr. Realist.  “Eventually” is a tricky word.  Eventually the world ends and entropy triumphs.  Saying “eventually” therefore is meaningless.  Realistically, Mr. Realist, for the reasonably foreseeable future, Mr. Icahn is mistaken.

TL Realist:                Most interesting, Cassandra.  Without your seeing an inflationary threat, what then is your prediction for the equity markets?
Cassandra:         My forecast is unchanged from our discussion last September:  There is no current alternative to an investment in the stock market [ED. NOTE:  discussed by TLR here].  Equities will continue to rise, although their government-driven levitation is likely to be at a slower pace and choppy.  With interest rates under the thumb of the Fed, debt and deficits will not be allowed to derail either America’s over-levered businesses or its over-leveraged economy.

TL Realist:                Although there are a number of analysts who agree with your near-term outlook for equities, Cassandra, relatively few share your confidence in either the transitory nature of rising inflation or America’s economic future.
Cassandra:         Oh, really, Mr. Realist?  Do you too disagree?  What do you prophesy?

TL Realist (smiling):              Unfortunately, Cassandra, I do not have your Gods-given predictive powers – I am unable to prophesy.  I simply am observing the economic strictures that have served economies in the past.  Doing so includes a belief in the efficacy of Stein’s Law [ED. NOTE:  found here and here], which states that there inevitably comes a time when economic trends end.  The data I’ve been following strongly suggest that we are nearing such a time …, although when that will happen is beyond the ability of mortals to accurately predict.  John Maynard Keynes wrote in 1919 about the sorts of government actions that threatened the world then …, and those same actions threaten America today:  “By a continuing process of inflation, governments … confiscate, secretly and unobserved, an important part of the wealth of their citizens….  [W]hile the process impoverishes many, it actually enriches some.  The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth….”  America’s government has been creating inequality through asset inflation (as well as by price inflation, concealing evidence of the latter by, among other things, redefining the Consumer Price Index (CPI)) because it has to devalue the unrepayable debt that it, its businesses and its citizens have incurred.  History demonstrates that this cannot continue indefinitely [ED. NOTE:  a subject TLR previously explored here].  The consequences are readily apparent [ED. NOTE:  and were discussed by TLR here].  The process of wealth-creation in America therefore has been subverted.  GameStop, AMC, Blackberry, Bitcoin and Dogecoin are recent examples of how the legitimate pursuit of wealth has degenerated into actual gambling [ED. NOTE:  discussed by TLR here].
Cassandra (laughing):     You truly are an alarmist, Mr. Realist.  Your analysis would result in your readers desperately searching for the sorts of risk abatement strategies that your fellow pessimists are recommending.  Because prevention is indeed less painful than the cure, those who are fearful of runaway inflation, stock market crashes, pandemics, climate change, virtual and physical wars, asteroid strikes, alien invasions and runaway artificial intelligence undoubtedly should consider risk mitigation strategies.  For them, stockpiling proverbial masks would be a worthwhile pursuit.  I’m not among those who currently fear such calamities.

TL Realist:                I’m gratified – and even somewhat comforted – to hear you say that Cassandra, coming as it is from someone whose name itself is a synonym for the accurate prophesying of disasters.  Your words provide an appropriately upbeat ending to our interview.  I accordingly will take this opportunity, speaking for both myself and the readers of TLR, to thank you once again for your insights and observations.
Cassandra:         You are most welcome, Mr. Realist.  Allow me to add that I would welcome any comments or questions your readers might care to convey.

Finally (from a good friend)

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