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Both The Market and Government Are Irrational

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economy

One of the great economic myths is that markets are rational. Not a day passes without this myth being disproved scores of times, but the myth persists.

For example, today (March 14) Bank of America/Merrill Lynch reported that "yesterday US markets started the day off with a strong rally after the solid retail sales report. . . . tailwinds are helping boost global equity markets today."

The "solid retail sales report" for February consists of 1% nominal gain. That is, the increase is not deflated by the month's inflation rate, which will be released on March 16. In other words, if very much of the 1% nominal gain in retail sales is due to higher prices, the inflation adjusted gain will not be statistically significant. The "rational market" took off without waiting to find out whether the gain was real.

Moreover, as statistician John Williams has established, the official Consumer Price Index (CPI) understates inflation. If an honest measure of inflation was used, retail sales could be in negative territory.

The "rational market" loves deception as long as it provides an excuse for equities to rise. The Federal Reserve's focus on "core inflation," which does not include rising food and energy prices, allows Federal Reserve officials to maintain that the inflation rate remains below target. By pretending that there is no inflation, the Federal Reserve continues to support banks with near zero interest rates while depriving savers and retirees of interest income. With no income from savings, people are forced to consume their capital. Thus, the Federal Reserve's policy makes bankers richer and the country poorer.

Meanwhile, those whose old age security is based on pensions are confronting insecurity. Many with private pensions were harmed by the financial crisis. Those dependent on Social Security and Medicare are finding that these programs are being blamed for budget deficits caused by multi-trillion dollar wars of choice. Those expecting pensions from state and local governments are finding that governments are unable to make good on underfunded pension benefits.

State and local governments counted on a growing economy and rising consumer incomes to provide the tax base to make good on underfunded pensions. These governments did not foresee that US corporations would destroy their tax base by moving manufacturing, engineering, IT, research and design jobs overseas. The absence of growth in real incomes for the vast majority of the people and the capture of productivity gains by capital at the expense of labor have added to the budget woes of most state and local governments.

John Rauh at Northwestern University estimates that the unfunded obligations of state and local governments amounts to $4,400,000,000,000, an amount that is within the ballpark of Joseph Stiglitz and Linda Bilmes' estimate of the cost of the Iraq and Afghanistan wars.

Money that could have saved Americans' pensions instead was allocated to profits for armament corporations and to advance Israel's territorial hegemony.

When the Occupy Wall Street movement says that Washington rules for the benefit of the 1%, OWS is not far off the mark.

 

http://www.paulcraigroberts.org/

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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Way to tell it like it is, Paul. A government that... by Ernie Messerschmidt on Thursday, Mar 15, 2012 at 11:40:17 AM
He does not even have the facts straight. He says:... by BFalcon on Friday, Mar 16, 2012 at 2:56:19 AM
a kleptocracy. How many Americans have figured thi... by intotheabyss on Thursday, Mar 15, 2012 at 2:42:29 PM
and there isn't anything that one can do but leave... by Lester Shepherd on Thursday, Mar 15, 2012 at 4:15:17 PM
Now everyone should understand why there was a nec... by Lewis Yang on Thursday, Mar 15, 2012 at 8:19:59 PM
Obama and Panetta have proven they are answerable ... by Steven G. Erickson on Thursday, Mar 15, 2012 at 9:59:26 PM
    How long have we been tolera... by dick overfield on Thursday, Mar 15, 2012 at 10:38:00 PM
withholding taxes, by the USG taxing labor to fund... by bogi666 on Friday, Mar 16, 2012 at 7:03:41 AM
Your article got things wrong saying governments w... by liberalsrock on Friday, Mar 16, 2012 at 9:36:29 AM
" When the Occupy Wall Street movement says that W... by Mort Persky on Sunday, Mar 18, 2012 at 2:07:13 AM
 Everything is going exactly according to pla... by Calvin Davis on Wednesday, Mar 21, 2012 at 10:53:17 PM