If Everything We Use as Benchmark and Advice is Faulty What is the Point of All this Information?

In the past few of weeks a number of startling suggestions have been made that pretty much shake one’s belief in collecting any kind of information or making any kind of suggestions using the information available. For me personally, the debate between the economics team of Goldman Sachs and Fathom Financial Consulting is not really that startling, though I will discuss it below just to highlight that anyone who actually understands economics knows that this argument is more about press attention than substance. What is fascinating is the number of people taking sides to support one or the other, as if either is even remotely close to reality.

What really startled me was the claims made by the anthropologist Peter McAllister in his book “Manthropology: the science of inadequate modern man,” that ancient aboriginals in Australia would have outrun Usain Bolt, the man who broke the world’s 100 meters sprint record, and that Neanderthal women would have crushed Arnold Schwarzenegger in arm-wrestling. If this is in fact true, and if we chose to assume that most data are unreliable we cannot then pick and choose which ones we accept (so I do suggest caution in accepting these claims as fact), then it would mean that all the nutritional advice that we have been sold over the years has been nothing more than hot air. If prehistoric people were stronger and faster than us with what must have been pretty awful diets, if we compare them to what is deemed healthy today, then any progress we have made in recent years in athletics is simply due to the greater use of those muscles that help us get better at certain sports and not the diet, as dieticians claim. I think most of us would be happy to go back to eating good food rather than eat what is supposedly good for us but has no taste and is significantly more expensive since it is branded as healthy.

With regards to economic data, anyone who spends two minutes thinking about how so much data can be collected and compiled in a useful fashion would know that it is impossible to get data at such an aggregate level that has any degree of reliability. Now, whether Goldman Sachs believes that initial GDP data is actually not the worth the paper it is published on or whether Fathom believe it is is really irrelevant when you think that no revision to that data will ever give an accurate reflection of the economy. At its most basic level, even the data used to analyze an individual company’s accounts is highly suspicious because it is at the mercy of the accounting method used for calculating the cost of the equipment sold or the hours charged, and that is if you ignore all the other legal ways you can manipulate domestic and international company accounts. In fact, if one accepts that cost of sales figures are impossible to accurately compile for individual stores, it quickly becomes clear that aggregate national data is almost likely to be way off the mark. For example, around 30% of Italy’s economy is termed “black economy.” How is that 30% calculated if no one knows how it is made up? The fact that credit is not even included in most, if not all, economic models proves that most are ignoring the actual oil that keeps the economic wheels turning. Add to that the fact each country uses different methodologies for calculating inflation, and that even GDP calculations are not universally similar, and we must then acknowledge that we are working with highly questionable micro-economic data that become fraught with major inaccuracies at the macro-level. The best example is China’s realization in 2009 that its GDP figure for 2007 was actually higher than previously thought.

Our own studies find that even pricing of simple financial instruments is not possible if one were to use scientific parameters to test the valuations obtained. The same will be true for more macroeconomic data. The reality is that even if these figures are plucked from the air it would not make that much difference, since they cannot be used to make correct public policy decisions. The important thing is that we all agree company X’s share price is $50, it really does not matter how that is derived. The same is true for economic growth data. As long as all agree that it is close enough to 2% then that should be fine. But, the problem is that they are not very helpful for managing the economy, which is why we have major economic shocks every few years and they take everyone by surprise.

For example, right now national governments are careful not to disturb the economic recovery and have kept rates at historically low levels; some are even pumping more money into the system. While they are watching the aggregate data the dragon that caused all these problems is raising its head once again, and so long as the current policies are followed it would get even bigger than it was prior to the crash. As money becomes increasingly cheap we will find that the property market bubble will re-emerge, and that the gold bubble might even get bigger. Yet, these bubbles cannot be managed by increasing cost of borrowing because that will bring the whole house of cards down.

As the housing bubble re-emerges and unemployment remains high, as most expect it to, many first time buyers will find that they will soon need to learn to make full use of the many muscles that their forefathers had forgotten over the past 20,000 years or so, if McAllister is to be believed, in order to be able to live outside major cities where they have to hunt for food and make shelters for their families. My only concern is for the welfare of those poor animals that will also have to learn to run faster since the modern man is on its way back to its roots.

This briefing is provided as general information, and does not constitute definitive advice or recommendations. Any views expressed in the above articles are those of the author concerned and do not necessarily reflect the views of Capco or any other party. Capco has not independently verified any facts relied upon in any of the comments made in any of the articles referred to. Please send any comments or queries to Shahin Shojai (shahin.shojai@capco.com). Shahin Shojai is the Editor of The Capco Institute journal (www.capco.com).