Both The Market and Government Are Irrational
Paul Craig Roberts
March 15, 2012
One of the great economic myths is that markets are rational. Not a day passes without this myth being disproved scores of times, but the myth persists.
For example, today (March 14) Bank of America/Merrill Lynch reported that “yesterday US markets started the day off with a strong rally after the solid retail sales report. . . . tailwinds are helping boost global equity markets today.”
The “solid retail sales report” for February consists of 1% nominal gain. That is, the increase is not deflated by the month’s inflation rate, which will be released on March 16. In other words, if very much of the 1%nominal gain in retail sales is due to higher prices, the inflation adjusted gain will not be statistically significant. The “rational market” took off without waiting to find out whether the gain was real.
Moreover, as statistician John Williams has established, the official Consumer Price Index (CPI) understates inflation. If an honest measure of inflation was used, retail sales could be in negative territory.
The “rational market” loves deception as long as it provides an excuse for equities to rise. The Federal Reserve’s focus on “core inflation,” which does not include rising food and energy prices, allows Federal Reserve officials to maintain that the inflation rate remains below target. By pretending that there is no inflation, the Federal Reserve continues to support banks with near zero interest rates while depriving savers and retirees of interest income. With no income from savings, people are forced to consume their capital. Thus, the Federal Reserve’s policy makes bankers richer and the country poorer.