The need for an alternative economics

When it comes to investments and business decisions, those who make the decisions hardly ever turn to economics for direction, and probably rightly so. Economic theory, as it is presented in most textbooks that are used in secondary schools and universities, has been found to be of little use when it comes to explanations of real-world developments in the economy. Concepts like growth and inflation are usually discussed in an arbitrary manner and because of that, their links to stock markets and bond markets are usually neglected.

Our economics is one built on the principle that all economies that are part of the global capitalist system move in cycles, and that understanding the nature of these cycles can help build an analytical framework to analyse economies and markets with the ultimate goal of business and investment decision-making.

Example 1: What explains the 40-year rally of bond prices from 1980 up to the present?

Everyone agrees interest rates generally follow inflation, but the question is what determines inflation, and what caused inflation to fall continuously from 1980 onward? If you ask an orthodox economist, the answer will likely be that “central banks successfully brought inflation under control”. That immediately raises the question as to why they have not managed to raise inflation given their clear desire to do so (Japan in particular). In spite of injecting massive amounts of liquidity over the past decade or more, the major advanced country central banks have been unable to raise their inflation rates with inflation even falling further in some cases.

The investment implications have been critical. Following the standard textbook explanation of money (QTM) would have prompted bond market investors to sell off their bonds in 2009, when central banks started aggressively increasing the quantity of money in the system. In reality however, bonds remained the one-way bet they had been since 1980, with yields falling (and prices rising) consistently along with inflation up to the present.

Example 2: Why have their been major corrections in stocks every 7-11 years?

In spite of their proven regularity, recessions are still considered by orthodox economists to be random shocks. It is no wonder then that most economists were caught by surprise when the great recession of 2008/9 arrived, and was accompanied by one of the biggest corrections in global stocks ever seen. Only 7 years before that, economists failed to see the 2001/2 recession coming, and 10 years before that they failed to predict the 1991 recession (see for example the IMF’s track record of forecasting growth). Even just following the NBER’s record of business cycles would have given some indication that economic downturns are a recurring phenomenon.

Again the investment implications are clear. The cyclical behaviour of economic growth has seen major corrections of global stocks every 7-11 years, suggesting that even the most recent correction in 2020 could have been predicted with cyclical analysis, rather than being the result of the “Covid-19 shock”.

Example 3: The Quantity Theory of Money and the explanation of inflation

Perhaps the clearest illustration of the problems with textbook economics is the Quantity Theory of Money (QTM) and its supposed explanation of inflation.

The past two decades have given overwhelming empirical evidence that QTM cannot explain inflation, and never has. Over the past 10 years the major advanced country central banks have printed more money than they did in the entire century before that. This should have led to hyperinflation, or at the very least somewhat of a rise in inflation, but in reality we have seen little or no inflation in these countries so the question is: Where does the theory go wrong?

It should be noted, in light of recent developments in debates surrounding the printing of money, that the above does not mean that any country can print however much it wants without paying a price for it (as MMT would suggest).