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Government Conspiracy Theories and Your Money

by: Jeff Miller June 05, 2008    
Jeff Miller

Jeff Miller

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We are amazed almost daily by the haughty and high-handed disrespect from Wall Street when it comes to the everyday workings of government.  So many powerful voices are so confident, and simultaneously so wrong.  This is typical when an expert switches subjects from something he really knows about-- stocks, trading, technical analysis, etc.-- to something he knows nothing about.

CNBC stimulates this with their "guest hosts" who are encouraged to offer an opinion on whatever topic comes up that hour.  Of course, some of their journalists are already participating in that way.  Looking to the frequently-cited wise men, Jonathan Berr runs down a short list, but there are many more good candidates.

When we see the errors, it is a "kid in a candy store" feeling.  Start with a bunch of traders, fund managers, and lawyers.  None has ever developed a quantitative model, and many cannot construct or interpret simple tables or regressions with statistical controls.  They have not taken (or do not remember) the beginning classes in government, economics, statistics, or research methods.

These pseudo-experts cite actual data, developed with great care by the strongest experts, as "a work of fiction."  As if they knew the difference!  Why?  Two reasons.

First, they do not like the result they see.  It does not agree with their own daily experience.  They confuse their own compartmentalized view of the world with reality.  It is also a message they can sell to their audience, often a niche group who share their world view.

Second, diminishing the real experts increases the influence of the pretenders.  If these powerful voices can convince most to ignore data, then anecdotal evidence rules.  It is an alternate data universe.

And the pseudo-expert is also the master of the anecdote.

The most prominent media voices support them.  Why?  It is a good story.   There are very few who choose to educate readers rather than to play to their existing biases.  It is a good business model.  Readers can understand anecdotes, but not statistical methods.

There is a symbiotic relationship between media and the pseudo-expert community.

Conspiracy Theory

Taken to the extreme, the pseudo-expert actually suggests that "government" is acting in a conspiratorial fashion.  It is pretty easy to recognize such superficial analysis.  It is the work of people who have seen too many movies and read too few books.

The biggest red flag?  Look for those who discuss the U.S. "government" as if it were a  unitary actor.  This is seen only in a ruthless dictatorship with a small inner circle.  Those who conclude, for example, that the President is "cooking the books" on inflation or employment data make this mistake.  They do not understand that the actual work is being done by a non-partisan senior executive service.  (Those interested in how government decisions are actually made should consult our summary article.)

A Failed Conspiracy

Actually, conspiratorial moves are rare and for good reason.  Even closely held secrets, like the original Watergate plan, have a way of leaking out.  The recent suppression of the global warming report provides a nice example.  Menzie Chinn at Econbrowser, one of our featured sites, discusses the report that the Bush Administration thought was too dangerous to release, now available after four years.

This Washington Post article shows what happens when the echelon of political appointees tries to tamper with the work of those who serve government regardless of the party in power.

This is an important example to remember the next time someone is selling a conspiracy theory that you should not be buying.

Investment Effect

One of the strongest things an investor can do is to discover information that is poorly understood or appreciated by everyone else.  It is especially ironic that the commonplace viewpoint is offered as "contrarian" by those taking it!

Briefly put, one can gain an investment advantage simply by identifying and believing information from the real experts on various economic topics.  How simple!

Where to start?  Here's a hint.  The "government" as represented by the diverse Congressional and bureaucratic interests has no unified position about the measurement of inflation.  Many members of Congress, for example, would like to increase Social Security benefits and labor cost-of-living increases.  They would be happy to see inflation measurements that would aid these constituent groups. The BLS employees have tenure and are not subject to political pressure.

Meanwhile.....

Big-name fund managers like Bill Gross have a strong financial interest in public perception of inflation and the economy.  Like any smart manager, he talks his book.  Should you be listening?

 

More later on Bill Gross versus the BLS, now in its fifth year, but still playing on a blog or TV station near you.

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This article has 8 comments:

  •  
    Jun 05 09:13 AM
    If you believe the government statistics on inflation, I have a Suburban I would like to sell you.
    Reply
  •  
    Jun 05 10:05 AM
    generally tempered well reasoned article. But 737 is correct. The statistics out of the government are widely ridiculed abroad. With most of the world showing 5-15 % inflation, thank your lucky stars you live in a low inflation country like the US. Give us all a break Jeff.
    Reply
  •  
    Jun 05 01:05 PM
    Yes, I once read that perception is normally 75% of reality for many. In this case we'll never know clearly what is perception and what is reality. Best bet? Believe no one and chart your own course on your own research and ...yes, perception.
    Reply
  •  
    Jun 05 03:05 PM
    Hi Jeff - I find your remarks to be right on. Plenty of people, not just the inflation folks, but also the gold bugs and monetary critics are hyping misleading statistics that are focused on confusing the dialog. Taking them to task just initiates a circular dialog. - Doug
    Reply
  •  
    Jun 05 08:51 PM
    Doug,

    Show us YOUR proof of the "misleading statistics". Pot-Kettle-Black

    Here's a little proof, at least more than you've offered! mises.org/story/2994
    Reply
  •  
    Jun 06 12:23 AM
    It is always interesting to read comments, and I always appreciate them. I am working on my book, which explores how people respond to evidence.

    So -- when I consider those who claim to know so much about how government makes decisions, I always wonder about their experience. Since I have worked in a high-level government policy shop, I have seen what is political and what is not.

    Many are going to operate from pre-conceived notions with no factual basis. I will never convince these people, and I am not going to try.

    Many of them are trying to sell you something -- gold, annuities, or other bearish products. My hope is to reach a few thoughtful investors who want to consider facts.

    I challenge those who are critical to produce some real evidence of a government conspiracy. I find that most of those criticizing the government know nearly nothing about how it works. Isn't it wonderful to live in a country where people can criticize and lose money in complete freedom!
    And those of us who take the other side of the trade also can do well.

    Thanks to those commenting, whatever your persuasion. I'll have more on the inflation theme.

    Jeff
    Reply
  •  
    Jun 06 10:45 AM
    I have to disagree... and here is why:

    currency debasement is as old as humanity - and that more than 200 fiat monetary systems have failed (they have all failed!!!) is very well documented, do your home work... then you have the 3 monotheistic religions forbidding "usury"... look at our global credit crunch now - with 600 trillion plus derivative ready to blow up and called weapons of mass destruction by Buffett...

    why are not taught all this in high school? Any idea. Following the path of the least resistance is tempting... smarter people will always abuse the ignorants... that is a conspiracy that is as old as humanity.

    Manias and stock market bubbles have dotted human history, so why do they still occur? Because it is the best way for the top 15% of the population to get very rich and quickly.

    Go to my site and read "The Final Monetization".
    Reply
  •  
    Jun 07 01:09 PM
    conspiracy or not,the bottom line is inflaton is eating away at our freedoms, as we speak. if we think differently about it then it may go away.everyone has his alternatives & choices are still available.making the right choices make huge differences !
    Reply
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