Last week I came across this quote via John Hussman:
“The spread of fire-suppression mentality can be linked to the establishment of forest management in the United States, such that by the early 1900s forests became viewed as resources that needed to be protected – in other words, burning was no longer allowed. The danger of this approach became tragically apparent in Yellowstone, which was recognized by the late 1980s as being overdue for fire; yet smaller blazes were not allowed to burn because of what were perceived to be risks that were too high given the dry conditions. And so smaller fires were put out, but in the end could not be controlled and converged into the largest conflagration in the history of Yellowstone. Not only did the fire wipe out more than 30 times the acreage of any previously recorded fire, it also destroyed summer and winter grazing grounds for elk and bison herds, further altering the ecosystem. Because of fire suppression, the trees had no opportunity or reason to ever replace each other, and the forest thus grew feeble and prone to destruction… In 1995, the Federal Wildland Fire Management policy recognized wildfire as a crucial natural process and called for it to be reintroduced into the ecosystem… Central bankers, too, could learn a thing or two from their forestry brethren.” -Mark Spitznagel, The Dao of Capital
What a brilliant metaphor for the central bank policies we have witnessed for at least the past several decades! The Fed has been desperately trying to prevent or put out fires only to make the markets and the economy that much more vulnerable to them by encouraging every greater debt accumulation and risk taking. It reminds me of this New Yorker article which also utilized an insightful fire-based metaphor and originated the term, “Minsky moment.”
“Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.” -John Cassidy, The New Yorker, Feb. 4, 2008
Rather than rein Wall Street in, the Fed, via policies aimed at stimulating a wealth effect, has only encouraged the arsonists to create more imbalances and greater instability. What will it take for them to finally take a page out of the forest management playbook and realize they can’t banish the business cycle?
For more Spitznagel insights see this video of his appearance on Bloomberg television from a couple of months ago:
Mark Spitznagel: The crash in risk assets has only just begun https://t.co/F7c7LaWbFv via @GratkeWealth pic.twitter.com/dNWY9l0Yuc
— Jesse Felder (@jessefelder) February 23, 2016