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The Heartless, the Brainless, and the Machines

Ben Bernanke the money bomber has resorted to delivering his anti-gold, pro-fiat sermons to captive audiences on US college campuses. He is returning to his roots as a professor.

But professors must profess. So what is Dr Bernanke professing? Obviously he’s repeating the claptrap that to simulate growth you need to lower interest rates. But according to the rather nauseating article (which isn’t much more than an appeal to authority) Bernanke is going after Herbert Hoover’s Treasury Secretary Andrew Mellon.

Mellon was asked by Herbert Hoover how to deal with the Great Depression. According to Hoover’s memoirs, Mellon replied:

Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

Now there is some doubt as to whether Mellon actually said this. The only source is Hoover, who was trying to make himself look compassionate and enlightened by comparison. But if Mellon didn’t say it, he should have. This is a common sense view, which is probably why so many people oppose it. Time does not make bad investments go good. The recession/correction/liquidation is the cure for the disease of inflation.

Mellon, if he actually said those words, certainly didn’t mean liquidation in the sense that say, Stalin, would have meant it. He wasn’t suggesting Hoover go out and shoot the farmers the same way Stalin liquidated the Kulaks who opposed his collectivist agrarian policies. But Bernanke reportedly called Mellon’s prescription, “pretty heartless”.

Isn’t that big of him?

The “liquidation” of bad investments is another way of saying that there comes a time when you must give up on the belief that an investment will come good. The sooner you do this, the better it will be for everyone. Resources like capital and labour will no longer be tied up in unproductive investments. But more importantly, human lives will no longer be engaged in activity that doesn’t make anyone more productive, wealthier, or happier.

Bernanke is the heartless one in all of this, even if he thinks his heart is in the right place. He represents an idea that has destroyed the life savings and purchasing power of millions of people. The control of money by central banks has sucked even more people into investment and borrowing decisions that will take them years to recover from, if they ever do.

It’s not only heartless to believe in fiat money. It’s brainless. Maybe that’s why the centralisation of the money supply by people who have infinite confidence in the technology of the printing press receives so much popular support. People who support it aren’t really thinking. They’re believing…and following orders. “Nothing to see here….move along.”

This brings us, finally, to the point we didn’t make yesterday because it didn’t occur to us! Is Hitler’s belief in the impregnability of his encryption machines at all similar to the belief high-frequency traders have in their machines? Here’s a letter we got with the idea:

Dan,

Loved your piece this morning about Hitler’s paranoia and the misplace trust in machines. Could it be that the Money Power is doing the same relying on ultra fast algorithms to do their bidding, as they now don’t trust the human aspect to judging a stock’s value….

Or is that just me being paranoid!

Keep up the fascinating comment and reasoning, I look forward to the DR every morning!

Kind regards,

Mark W.

Now that is pretty interesting. We’ve written before that the growth of high-frequency trading and algorithm-based trading is itself based on a faulty idea: that everything that happens in the world affects the price of every security, every second and requires the constant, computerised repricing of securities…and this is tradeable.

That seems absurd to us. If anything, the growing domination of the trading bots has divorced securities prices from underlying value. The pricing mechanism of the market itself starts to break down when it becomes self-referential…automated trading strategies adjust to each other without any human intervention or human judgement. It’s not a market anymore. It’s just a computer talk fest.

There is certainly a bad idea somewhere in all of this, or a misplaced belief in the power of machines to improve markets. If anything, machine-based trading is leading to more instability and volatility within the financial system. It’s not leading to better price discovery. It’s leading to price irrelevance.

The automation of trading coupled with the compulsory inflow of your cash into the market is another way in which the modern investment game is rigged. It makes it very hard to win. Not playing is an alternative. Or buying tangible assets and precious metals, even if Ben Bernanke doesn’t like (or understand) them. We’re not trying to make money from gold. We’re trying to avoid losing purchasing power on the value of our labour.

Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

Gold Money: A Once-in-a-Generation Buying Opportunity
2012-03-23 – Greg Canavan

A Question Australia Might Have to Answer
2012-03-22 – Joel Bowman

Australian Tax: Running Government at a Profit
2012-03-21 – Nick Hubble

China: Why All Feasts Must Come to An End
2012-03-20 – Satyajit Das

Greg Smith – A Former Goldman Sachs Insider Finally Speaks Out
2012-03-19 – Eric Fry

Dan Denning
Dan Denning is the Editor-in-Chief of The Daily Reckoning Australia and the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 as a small-cap analyst. From 2000 to 2005 he was the managing editor of Strategic Investment, where he recommended gold and warned of the US housing bubble. Dan has covered financial markets from Baltimore, Paris, London and, beginning in 2005, Melbourne Australia, where he is the Publisher of Port Phillip Publishing. To follow Dan's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

4 Comments

  1. Bron Suchecki says:

    http://economics.org.au/2012/03/the-best-australian-think-tank-is/

    “The Daily Reckoning Australia has more respect for Australian history, and is more popular, more radical and more consistent than the Australian think tanks.”

  2. Anon says:

    All this talk of trading algorithms divorcing security prices from value is a big stretch from reality.

    At least 80% of the stock market volume is done by large brokers who trade on behalf of fund managers. The fund managers represent real demand for stocks based on inflows or outflows and strategic investment decisions. The use of algorithms has grown largely as a way of automating large transactions by breaking the volume down into smaller parcels to have less impact on the market. Yes the computer is executing all the millions of orders and making decisions when to put a new parcel on the market but the daily demand and supply is still determined by humans who are following an investment strategy.

    Only a very small amount of the volume is made up from proprietary trading companies who are using algorithms purely for trading profit.

  3. shortchanged says:

    You have forgotten GREED, Dan,.Using the sin of going off track, i present the following. At one time making a reasonable profit from ones investments was enough. Then came along Bonuses, to my mind the devil incarnate, together with convoluted ‘financial instruments’ and other fraudulent schemes.
    If bonuses are such a good idea, why don’t the garbage men, truck and bus drivers, painters, etc get one, in fact why dosen’t everyone get a bonus, using the same formula as these ‘clever’ executives. You would not want a school bus driver hacked off because he was thought unworthy of a bonus, would you?. Until we get some perspective in all this, there will not, be a solution.

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