Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Investing lessons from the 1987 Stock Market Crash From Who Beat it - 20th Oct 19
Trade Wars: Facts And Fallacies - 20th Oct 19
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Central Banks are Not Innocent Bystanders

Politics / Central Banks Nov 17, 2014 - 10:08 PM GMT

By: MISES

Politics

Peter St. Onge writes: In a recent paper cited last month in The Economist, a trio of economists ran a kitchen sink’s worth of correlations on investment numbers. Kothari et al. concluded that profit growth and stock price boost investment, but that interest rates have a negative effect. This claim runs counter to Austrian business cycle theory, so let’s have a look.


Despite their data actually saying that lower rates actually lower investment, Kothari, et al. conclude there is “little evidence” of a relationship. I guess they have to say this because, otherwise, people would laugh. Why would people laugh? Because if your data says that lower prices lead to lower demand, you either have bad data, or you have too much noise.

Either way it’s not causal, and it could be embarrassing to say it is. Am I being unfair to Kothari? Does not data speak the phoenix of truth, arising from the ashes of superstition? Well, when the data says something that contradicts elementary theory, you have three choices as a researcher. First, maybe the theory is wrong. Second, you check whether your data is wrong: too many zeros? Is it mistyped? (Notorious economist Thomas Piketty might have benefited from this.) Third, you conclude the data is noisy. Therefore it is not saying what you think it’s saying.

Well, the theory that a lower price for an identical product raises demand is pretty sound — that’s why demand curves slope downward. If it were not true, I would buy Cokes for a dollar, sell them for ten, and have a line around the block.

So if the theory is sound, then the remaining possibilities are that it’s bad data — either it’s a typo or it’s full of noise. I have no reason to doubt Kothari et al.’s figures, and MIT runs a tight ship. So it’s probably not typos.

So we zero in on that noise. Can we think of any noisy factors surrounding interest rate policy? Wait, perhaps you’ve heard of something called a central bank.

It’s a fairly uncontroversial assertion that central banks don’t raise or lower interest rates randomly, like fluctuations in temperature. It’s not a “random walk,” with Bernanke and Yellen flipping coins over lunch. Rather, central bankers move interest rates at specific moments: they raise them when they think the economy might “overheat,” and they lower when they think it is at risk of recession.

This means that central banks raise rates specifically when they expect investment to be strong (“overheat”). And they lower rates specifically when they expect investment to fall (“recession”).

So what Kothari et al. are missing is that investment trends actually cause rate changes. Central bankers’ expectations of overheating cause higher rates, and their expectations of recessions cause lower rates. So we would indeed expect that falling expected investment would be associated with lower rates, but the causation here isn’t rates-to-investment, its investment-to-rates, with a stopover in the vivid imagination of some central bankers.

So we’ve got two causal relations. First, from Econ101, that lower prices raise demand of identical products: “low rates raise investment.” Then we can toss in the causal relationship where high investment scares the Fed into raising rates: “raised investment raises rates.” And now we’ve got two correct causal chains that exactly contradict. We’ve spotted our noise. And now we have the likely explanation.

As a nice bonus, we also now have the truly helpful interpretation we should take away Kothari et al.’s findings: that the central bank’s reactive rate movements fail to smooth the boom-bust cycles they set in motion. Of course, we all know this, since we live in the real world and observe business cycles in the wild, despite our imaginative and apparently busy central bankers.

Kothari et al. can be seen as a contribution for its confirmation of a key Austrian claim, that central banks can’t tame the storms they raise. But the paper certainly does not mean what its authors think it means — that interest rates are relatively innocent bystanders in the business cycle.

Peter St. Onge is a Summer Fellow at the Mises Institute and an Assistant Professor at Taiwan's Fengjia University College of Business. He blogs at www.profitsofchaos.com. See Peter St. Onge's article archives.

© 2014 Copyright Peter St. Onge - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules