Wednesday, June 12, 2013

Dear Prudence, Won't You Come Out To Play

When David Brooks referenced a number of word studies several weeks ago, the word "prudence" got stuck in my head, which is one of any number of words which have largely disappeared from everyday language. I remembered it again this morning, in the middle of the latest (update) diatribe in regards to central banks not caring about the welfare of their own citizens, After looking up an alternative to the somewhat more bland "discretion" (the word I did use for the update), there it was. According to The Webster's New Universal Unabridged Dictionary(1983),  here's just a portion of some definitions for prudence:"...the habit of acting with deliberation and discretion; wisdom applied to practice."

 Also, there is an example of word usage. According to George Washington, "It would be the point of prudence to defer forming one's ultimate, irrevocable decision so long as new data might be offered." I didn't know data was such a common word in Washington's day! Of course, the word prudential also refers to some designated financial activities, but somehow that example reminds me of a clear running creek that gets dug up and turned into a drainage ditch, for a subdivision subsequently named Clear Creek.

Is the problem with prudence simply that it doesn't make anyone any money? How do we account for the (still) ongoing discrepancy between creating wealth and just creating out and out hardships with unrealistic contractual arrangements? Maybe we don't have the good deflation which some such as George Selgin long for, because no one wants to ask prudence out to play. Perhaps it wouldn't be so bad that Prudence has to sit home alone, if in fact central banks were willing to accept a nominal targeting rule for their own game. That is, by so doing, they wouldn't have to rely on Prudence to do what they're supposed to do in the first place - which is to provide economic stability.

As it is, central banks remain a bit too happy to blame everyone else for today's austerity. But if - in any number of instances -  the citizenry are expected to have their lives irrevocably changed, why no essential restructuring for central banking, or for that matter any significant changes at all? Because - with no nominal targeting rule - those with the money are still quite happy to run too far with it when times are good, and then pull back just as tight when leveraging processes have once again run their course: never mind the fact that they have to take away future income from their own citizens just to run too far in the first place. Plus, with no nominal targeting rule in place, the benefits from good deflation of tradable goods in an economy - with even slight inflation - is like candy that those who profit from contractual arrangements can scarcely resist.

This particular dictionary - of a size that swallows the top of a small end table, still has more to say about my new friend Prudence. By comparison, her cousin discretion seems to be a bit more secretive and, mmm, separate....as in acting without any control but one's own judgment. Careful management of the economy is a characteristic of Prudence, and to be prudent is to be capable of exercising sound judgment in practical matters, with caution and sensibility. Let's think about this for a minute. How do we know that most who are associated with the Federal Reserve are actually cautious, sensible and capable of sound judgment? Other than the catastrophe of the Great Depression, the Fed has enjoyed a pretty good run in the last 100 years, some of which we "got lucky" to say the least. Don't push it, guys and gals! Just because we really need to be able to depend on you now, doesn't means the next 100 are any guarantee, especially if you don't make friends with Prudence again.

Last but not least, I felt compelled to look up the phrase "Discretion is the better part of valor" and it did not disappoint.
It is good to be brave, but it is also good to be careful. If you are careful, you will not get into situations that require you to be brave.
Immediately, Nick Rowe's recent musings on potential long term gains from twenty years of level targeting came to mind. Twenty years of NGDPLT would mean being careful gets higher priority over being brave. That would mean quite a lot, given how hard it is for central banks to be brave in the present.

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