Research & Analysis for Business
and Investment Clients
The United States Federal Reserve System, founded by Congress in 1913, pursues a safer, more flexible, more stable monetary and financial system (The Federal Reserve System - Purposes & Functions).
The Fed's mission mixes safety, flexibility, and stability, while the financial system grows increasingly complex and fluid (recall the flash crash and large bank/insurer failures in late 2008). What can we expect from the Federal Reserve and what should we expect?
Reviewing broadcast news media and internet content, little reasoned discussion exists.
Perhaps the Ivory Tower provides wisdom?
While theoretically sound and grounded in reason, theoretical academic manuscripts by prominent Ivory Tower economists rely heavily on idealistic assumptions. A recent manuscript by (Gauti B. Eggertsson (NY Fed) and Paul Krugman (Princeton)), published 16 November 2010, uses the word "assume" or similar variant 33 times.
Deriving monetary and fiscal policy from such models is hopeful at best, an algebra driven social experiment at worst.
Compare this esoteric document to the clean, business grounded letter to shareholders from Warren Buffett, Berkshire Hathaway's CEO.
While protractor, pencil, and log-log graph paper, are helpful, an economy generating petabyte data streams yields real-world data current to the latest second. Global supply chains track packages, trucks, aircraft, rail cars, and digitally tagged devices. Data are facts, not economic assumptions. We should expect more than assumptions and theory.
This report discusses traditional thought and conventional wisdom propagated by economic luminaries, reviews common economic assumptions, and points the reader to thought leaders moving economics away from a "dismal science".
Global trade, monetary and fiscal policy, business, and consumer behavior will move towards an empirical foundation. Companies, firms, and funds leveraging data and understanding how others use data will have significant competitive advantage.
Once doctors practiced patient alchemy based on intuition and conventional wisdom. Evidence-based medicine emerged to dispel a belief system. Economists would do well to adopt an evidence-based discipline.
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