Aug. 20th, 2008

peterbirks: (Default)
I see that there was another three-way-split on the best move for interest rates in the UK - 1 up, 1 down, seven the same. The committee noted that "The minutes showed most wanted to hold rates because although inflation was rising, growth prospects had worsened."

This reminded me of one of the several insane rules implemented in the Dungeon way back in the day that Roy Houghton ran it -- this being that, if you were considered to have taken too long to make a decision, you were barred from raising, although not from calling or folding.

The comparison works because it's a common assumption that, if you have two extremes, then the "compromise" is, by default, the "middle way". It's a fatuous viewpoint that has no basis in logic, but it dominates our life.

One reason is dominates our life is that we have too many meetings where compromises are reached, and too few people willing to make executive decisions that might go wrong.

In poker, it's often a close call between raising or folding, with calling being by far the worst option.

The same line could perhaps be applied to interest rates. It might be right to raise them (to choke off inflation) and it might be right to cut them (to boost the economy), but these too extremes do not "balance out" in a middle way of keeping interest rates unchanged. Doing nothing might well be the worst action of all.

The US and the ECB tend to take diametrically opposite views on the right thing to do - the ECB will go to keep inflation down, while the US will move to stimulate the economy. The UK perversely feels virtuous in taking a "compromise" solution. In fact, it's probably the silliest solution of the three.

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