Newsletter – March / April 2013 – The laws of diminishing returns


The laws of diminishing returns

I watched the most fascinating documentary recently on the properties and nature of the universe. How big is it? What’s its shape? How fast is it contracting? What are the properties of dark matter or all the space that lies between all the physical things we can see or measure in the universe? What I learned was that the universe appears to be infinite, with no with boundaries, that its expanding (this theory has been around for some time but now its an accepted state) not contracting, that dark matter is being stretched with the expansion and is finite, and that a newer discovery, dark energy, accounts for the expansion and pace of acceleration of the universe, and more than 70% of the universe’s density. The point is that principles, even as they are updated, reaffirmed or refuted, must guide our understanding of things about us, including economics.

We may disrupt economic trajectories, but we cannot suspend them. Since 2008 the US central bank, led by Benjamin Bernanke, has attempted to engineer certain outcomes – full employment, growth or inflation, and an increase in equity valuations – based on its management of interest rates and, in part, it’s “too big to fail” policy with regards to businesses. Today, this can be said of other global central bankers too, but not to the extent shown by Bernanke, or his predecessor before him, Edward Greenspan, for that matter. In the past two weeks, the Japanese have pulled out all the stops in providing stimulus, which has pounded the Yen and JGB’s. Besides Wall Street, it seems that all streets lead to the US Federal Reserve, when truly, all participants and stakeholders should understand that upside consumption or demand can appear to be bolstered by centrally managed planning only for a limited amount of time. For a recent example we can look at the government policies to push up housing in the mid 2000’s. Like gravity or dark energy there are economic principles that are inviolable.

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