Sometimes the most important, critical issues of our time are buried in articles that most people, seeing the headline, would skim right over and completely miss. This linked article reports on the growing concern at central banks around the world that their macroeconomic models are failing them. They are finding themselves powerless to halt the rising specter of recession. Here are a couple of key quotes from the article:
The world may have changed on August 9 last year as the credit crunch first bit, and even some policymakers are beginning to question whether the way they work out what’s happening in the economy is flawed.
… “I am very struck by the value placed on little models that are never actually confronted with data from the real world,” said one G7 central banker. “This is not science in my view.”
And the article concludes with Belgian economics professor Paul De Grauwe, while observing that current economic models act as a “Maginot line” for the central banks in their fight against inflation, asking:
… are they prepared to fight the new one against financial upheavals and recession? The macroeconomic models they have today certainly do not provide them with the right tools to be successful.”
He is exactly right. Economists’ macroeconomic models are failures because they have turned a blind eye to what may be one of the most powerful factors in economics, the relationship between population density and per capita consumption and its role in driving unemployment and poverty higher once an optimum population density has been breached. Economists fail to recognize the theory I’ve discovered and presented in Five Short Blasts. For decades, they’ve papered over these effects by reducing lending standards, making it easier for people to build an illusion of prosperity on a mountain of debt. And they stopped the rise in unemployment in the overpopulated world by exporting it to America. Now that America’s wealth has been plundered and redistributed to the rest of the world, economists have reached the end of their rope. America can take no more and is defaulting on its debts – American consumers first, but it’s now difficult to see how the American government itself won’t soon follow.
The article places blame as follows:
It is commonly held that the global credit crunch started on August 9 last year. However, its cause can be taken back to exceptionally low interest rates after the September 11 2001 attacks on the United States, which prompted investors to look almost anywhere for greater profits.
Banks started making home loans to Americans who could not previously get credit, and packaged up this “sub-prime” debt into complex financial instruments which few people understood.
When U.S. property prices collapsed and defaults rose, financial institutions around the world found themselves holding billions of dollars’ worth of toxic debt. They stopped lending to each other and the credit crunch began.
Actually, its cause can be taken back further. Economists need to question why it is necessary to keep feeding Americans more and more debt to keep the economy afloat. The answer, of course, lies in our trade deficit, which has robbed America of millions and millions of its best-paying jobs. America has imported the effects of overpopulation – unemployment and poverty – from China, Japan, Germany and every other grossly overpopulated nation who can get their hands on a piece of the American market.
The only escape from this mess is for America to extricate itself from the “little models that are never actually confronted with data from the real world” upon which our trade policies are based, and for nations around the world to come to grips with the problem of overpopulation, if not out of concern for the environment and resources, then out of concern for restoring a healthy economy.
The good news here is that economists are beginning to question some of their most basic assumptions. I really don’t care if one of them discovers the role of population density by picking up my book or if they come up with it on their own. But one way or another, it has to be factored into economic policy.