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The "I wish" syndrome
Jun. 22nd, 2009 02:08 pmThere's a well-known logical fallacy that is based on a misinterpretation of the laws of cause and effect. In poker it's amazing how often you see this error, particularly when a player is on tilt.
Put simply, if you have a good hand, you tend to bet more into the pot.
This means that there is a positive correlation betwen strength of hand and bet size.
The misinterpretation is that, if you bet more into the pot, that makes your hand a better hand, one more likely to win. It's almost as if a player believes that, by putting a big bet into the pot, in some kind of quantum mechanics way you make it more likely that your opponent has worse cards.
The German government appears to have fallen into a similar trap. I'm grateful to Wolfgang Münchau for mentioning this in today's FT.
He reports that a balanced-budget law has been introduced into the German constitution. From 2016 it will be illegal to run a deficit of more than 0.35% of GDP. From 2020 the federal states won't be allowed to run a deficit at all.
As is often the case, the most significant macro-economic events tend to go unnoticed at the time. The implications of this law are horrific for the eurozone. Either the euro survives but Germany becomes an economic basket-case, or the unilateral rules brought in in Germany will stress parity of the euro so severely that the currency itself will collapse.
That doesn't mean that it's going to be a one-way downtrend for the euro -- one thing that will help it in the short term is that the dollar is heading for two or three years of structural weakness. And in the long run we are all dead. But just because you can't make short-term profits from something doesn't mean that you should ignore it. This law, in effect, is a death sentence for the euro, probably by 2025 at the latest, 2016 at the earliest.
Given Germany's love of the principle of the euro, this might, therefore, seem like an odd financial decision to make. Why did they do it?
Well, on the one level, the Germans hate debt. Growth should be gradual and funded from internal resources at both a macro and micro-level. Leveraging a loan so that a small company can grow quickly is seen as rather louche in Germany -- the kind of thing done by those who are not quite respectable (i.e., non-Germans),
But, on the other level, it's this error of causation. Running a budget surplus happens automatically when times are good (hell, even Gordon Brown managed it in the late 1990s). Therefore, good times and budget surpluses are positively correlated. Therefore, the flawed logic goes, if we make budget deficits illegal, good times will last forever!
This, quite clearly, is economic moronism. When times get bad you need deficits to boost the economy. It's a cure. Look at it in terms of the human body. When I am well, I don't take pills. When I am ill, I take medicine. Therefore taking medicine is positively correlated with being ill. Therefore if we ban all medicines, no-one will get sick.
All hope is not lost. The law can be changed, although it will require a two-thirds majority and the fight will be against the inbred German prejudice against debt. But the alternative, the death of the beloved euro, might focus a few German minds in the direction of common sense.
_____________
Put simply, if you have a good hand, you tend to bet more into the pot.
This means that there is a positive correlation betwen strength of hand and bet size.
The misinterpretation is that, if you bet more into the pot, that makes your hand a better hand, one more likely to win. It's almost as if a player believes that, by putting a big bet into the pot, in some kind of quantum mechanics way you make it more likely that your opponent has worse cards.
The German government appears to have fallen into a similar trap. I'm grateful to Wolfgang Münchau for mentioning this in today's FT.
He reports that a balanced-budget law has been introduced into the German constitution. From 2016 it will be illegal to run a deficit of more than 0.35% of GDP. From 2020 the federal states won't be allowed to run a deficit at all.
As is often the case, the most significant macro-economic events tend to go unnoticed at the time. The implications of this law are horrific for the eurozone. Either the euro survives but Germany becomes an economic basket-case, or the unilateral rules brought in in Germany will stress parity of the euro so severely that the currency itself will collapse.
That doesn't mean that it's going to be a one-way downtrend for the euro -- one thing that will help it in the short term is that the dollar is heading for two or three years of structural weakness. And in the long run we are all dead. But just because you can't make short-term profits from something doesn't mean that you should ignore it. This law, in effect, is a death sentence for the euro, probably by 2025 at the latest, 2016 at the earliest.
Given Germany's love of the principle of the euro, this might, therefore, seem like an odd financial decision to make. Why did they do it?
Well, on the one level, the Germans hate debt. Growth should be gradual and funded from internal resources at both a macro and micro-level. Leveraging a loan so that a small company can grow quickly is seen as rather louche in Germany -- the kind of thing done by those who are not quite respectable (i.e., non-Germans),
But, on the other level, it's this error of causation. Running a budget surplus happens automatically when times are good (hell, even Gordon Brown managed it in the late 1990s). Therefore, good times and budget surpluses are positively correlated. Therefore, the flawed logic goes, if we make budget deficits illegal, good times will last forever!
This, quite clearly, is economic moronism. When times get bad you need deficits to boost the economy. It's a cure. Look at it in terms of the human body. When I am well, I don't take pills. When I am ill, I take medicine. Therefore taking medicine is positively correlated with being ill. Therefore if we ban all medicines, no-one will get sick.
All hope is not lost. The law can be changed, although it will require a two-thirds majority and the fight will be against the inbred German prejudice against debt. But the alternative, the death of the beloved euro, might focus a few German minds in the direction of common sense.
_____________
