Why common sense is often the best response .

The writer Mark Twain wrote almost 50 books and yet is almost certainly better known for his aphorisms. The pithy one liners that combine folk wisdom and common sense are such that even ones he didn’t write are attributed to him, such as the one from Voltaire, that, “Common sense [the essence of Twain] isn’t that common”. For investors, however, perhaps one of the best is, “History doesn’t always repeat itself, but it often rhymes”, since one of the things we learn from history is that people are too often guilty of assuming that history repeats itself exactly. 

Currently, we see the three biggest problems facing Western economies as arising from exactly this issue of overly precise models that not only ignore Twain’s dictum, but also Voltaire’s. The triple threat of  zero interest rates, zero Covid and zero carbon has arisen from the models developed by the Federal Reserve, the WHO and the UN respectively, models that have been assiduously applied by national governments, even as they have failed to deliver anything but unintended consequences.

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Thus, as the collective West followed the Fed in lowering to somehow ‘stimulate inflation’, we saw inflation everywhere but the high street. Twain’s common sense would have pointed out that people relying on cash savings to live would not go out and spend more as rates fell as the models ‘predicted’, they would instead save more, just as they had done in Japan. It might also have pointed out that an artificially low cost of capital would prop up zombie companies, and keep an excess supply of goods and services that would keep prices lower, rather than higher, as well as the fact that the carry trades in capital markets were driving speculative bubbles.