Sunday, February 22, 2009

The Power of Magical Thinking

In Cartoon Laws and the Economy, by Paul Petillo, we have a primer on the fundamental processes now at work in our government's efforts to "revive" a hopelessly compromised financial system. Here is Petillo's "Cartoon Law I":
"Any body suspended in space will remain in space until made aware of its situation." If the economy steps off a cliff even as we spend countless hours listening to educated bankers and economists tell us that the near future looks fine, you can expect the following to happen. The President takes the microphone and declares, while loitering midair, offering such tidbits of wisdom about the beneficial effects his stimulus package this or his tax cut that, until he chances to look down. And you know what happens next.
The dynamics of the situation are demonstrated in the following diagram, from another, more technical, analysis, called the Wile E. Coyote Effect:
The above is what actually happens when some object runs or is pushed off a cliff. But the majority of people believe the object will actually hang in the air for an instant before falling, as in the leftmost trajectory of the following diagram:
Most get it wrong because they have watched far too many cartoons. In the world of high finance, however, where the laws of psychology are more important than the laws of physics, trajectory 1 does in fact apply. It is certainly possible to find oneself suspended in space when contemplating the dynamics of our economy, buoyed up by something called "confidence," which we are told we need more of -- as in the phrase "confidence game."

Here is Petillo's Cartoon Law IV:
"The time required for an object to fall twenty stories is greater than or equal to the time it takes for whoever knocked it off the ledge to spiral down twenty flights to attempt to capture it unbroken." This is my favorite axiom of all. Who among us has not seen the Federal Reserve do this with each rate cut? And now as Fed chairman Ben Bernanke wonders if inflation is worth controlling even if there is no wage-price spiral evident (an inflationary benchmark that suggests the worker will have the ability to demand higher pay because things cost more and the employer, reluctantly will give this wage to the worker creating a spiral downward dragging the whole of the economy with it) as he races down the stairs. Only Cartoon Law IV is a waste of time. The priceless nature of the economy, the object hurtling through space in this instance, falls victim to the inevitable comic result: the attempt to catch it is unsuccessful.
Most amusing of all is the mystification experienced by the pundits, especially the pompous, humorless, pseudo-conservatives of the Republican Party, as they contemplate the transmogrification of their "free market" Capitalist system into, horror of horrors, socialism, via the nationalization of the banks. Well they ain't seen nothing yet. Because Mr. Coyote will ultimately fall, at an ever accelerating rate -- straight down into the sort of neocon Hell where everything becomes nationalized. Not because anyone actually wants that, but due to a hitherto unknown law of economics that I will call Cartoon Law XYZ: when Capitalism goes into free fall, the only power in the world that can stop it is: socialism. And if you doubt me -- do the math: as in 2 + 2 = 4.

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