The Language of Inflation
John Mauldin | Nov 12, 2013
My good friend Dylan Grice takes a very interesting tack in the latest issue of his Edelweiss Journal, today's Outside the Box. Rather than attacking our macroeconomic problems directly with economic tools, he approaches them from the point of view of what he calls a "subtle but significant devaluation of language." Now, you might think that the words we use to describe and understand the economy are not in themselves very powerful economic determinants, but Dylan lays out a convincing case to the contrary.
Dylan has fun with a Google app called Ngram Viewer, which allows users to search for the occurrence of words or phrases (or n-grams, which are combinations of letters) in 5.2 million books published between 1500 and 2008, containing 500 billion words, in American English, British English, French, German, Spanish, Russian, and Chinese.
Using Ngram, Dylan and colleagues have detected an exponential increase in the past few decades of such phrases as economic crisis, macroeconomic stability, policy intervention, financial engineering, and wealth management, and in such words as leveraged, arbitrage, risk, and growth. Use of the word financial overtook industrial shortly after 1980, he notes, and now far exceeds it. Likewise, spending now outstrips saving.
OK, so there's a lot of funny money floating around these days, and we like to yak about it. But does that mean our language is influencing our economic outcomes? It's a subtle but powerful process, Dylan says. Most of us appreciate that language shapes our ability to formulate, recall, and modulate the concepts that we then implement as world-changing actions; so language really is fundamental. And, Dylan asserts, when we vastly inflate key terms that we use in describing – and in attempting to manage – the economy, we create the dangerous illusion that we are all-powerful.
Dylan sets us straight in his opening paragraph:
Regular readers of our irregular publication will be aware of our thoughts on inflation, but for those who are not we would summarize them thus: inflation is not measurable. We can summarize our views on money with similar succinctness: it is poorly understood. And as for the economy, we know only this: it is a complex system. From these observations can be derived a straightforward corollary on economic policy makers: trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things which happen weren’t supposed to happen.
And in his closing paragraph he sums things up more succinctly and pithily than I ever could:
Today’s language of inflation embeds so many of these false ideas that the full rottenness of what passes for financial thinking today is obscured.
I wrote the following note to Dylan upon reading this piece over lunch the other day.
This reads so pure and profound as to make me weep, on one hand for the pleasure of reading your prose and on the other hand for not having written it myself – or maybe more precisely, for not having the skill to write with such beautiful style and clarity. Those sitting around me here at lunch must wonder at my composure and beatitude as I ignore my sushi and pour over your latest. This may be your finest composition; it's at least the best thing of yours I have read. And with such a body of impressive work, that is saying something.
This is a briefer and far more eloquent statement of the driver behind Code Red, that central banks are indeed steering us ever closer to a "monetary trap," an alley, if you will, in which we are very likely to be mugged. This way be dragons.
I believe you will enjoy this piece. Incidentally, I notice that some of Dylan's Ngram curves that were trying to go asymptotic (straight up) have started to roll over since the Great Recession hit. I do wonder what that means.
Code Red made the Wall Street Journal best-seller list this weekend. Thanks to those of you who have bought the book and made that happen. The reviews are quite positive so far. Fixed-income maven Richard Lehman over at Forbes wrote a very nice piece about Code Red this weekend. I am very pleased that he spoke so well of it:
If you read only one book on finance this year, read Code Red: How To Protect Your Savings From the Coming Crisis by John Maudlin and Jonathan Tepper. It is a recounting of current Federal Reserve Bank’s “Code Red” policies for dealing with its mandate of promoting full employment while maintaining financial stability. The Code Red moniker is intended to draw attention to the unprecedented nature of those policies and the dangers we face when they are finally undone.
He goes on to say,
The book finishes with the most important chapters, what you can do to protect yourself from the almost certain negative fallout these policies will produce. This section alone makes the book a must read…. The authors see the end of a long secular bear market, but on the brink of a new secular bull market. Despite their dour outlook for the short term, they are basically bullish on America.
“But,” he concludes, “No book review is considered complete without saying something negative; so, I think they should have titled it Code Blue.” I’ll accept that, Richard.
I am off to NYC early tomorrow morning to be at the NASDAQ for the closing-bell ceremony, to celebrate the launch of a new ETF called ROBO, focused on robotics, automation, and 3-D printing. Then I'll be on Bloomberg radio from 8-9 with Tom Keene and on other media throughout the day. I'll hang around for the evening to be with my old friend Steve Forbes for an interview Thursday morning before heading back to Dallas to see what progress, or lack thereof, has been made on the new apartment.
Finally, my good friend Reid Walker launched an organization called Capital for Kids that raises money from the Dallas investment community (and their clients!) in order to help kids in all manner of activities. They have their big annual soiree Thursday, November 21 at the F.I.G. here in Dallas. Join me and several hundred fun people to help kids who need it. And bring your checkbook. The silent auction is loaded with cool items. Click on the link and look for me when you get there!
Your thinking about how we use words analyst,
John Mauldin, Editor
Outside the Box
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