Is there too much maths in economics? February 7, 2025

26:33Tensions between the UK and the US weren't, you know, a little bit, you know, again, there's parallels here right and so i was like well let's do this even though it will suck in terms of everything that you just said prices will go higher things will be harder living standards will reduce but from a strategic no kicker kicker from a strategic national standpoint it is important that we we do have a manufacturing base and and while we will not have the we do not not do we do not have the comparative advantage right now, over time, we will get better and better and better at it. And we'll be better off in the long, i.e.

27:12we'll reduce our dependence on foreign markets. We will reshore manufacturing, we will reshore jobs. And potentially, potentially, that could actually sort of happen. I mean, there is some, there's a whole bunch of weird things in the world. One of them is, is that there are parts of the US military that are supplied by componentry from China. Yes. And it's like, well, look, I don't want to get in. I'm certainly not going to saber rattle here or advocate for any kind of particular stance. But that to me seems like, well, that could not be good if things did get worse. So I guess what I'm saying is there are the dollars.

27:53Oh, totally. And there are broader considerations. And I just put that out there because someone else will say it if we don't. And if you can, you know, thread the needle on that, and the pain isn't too extreme, and at the other end, the longer-term benefits are big enough, then, yeah, I will concede that there will be sense to it. Now, the degree of difficulty on that is very high. A lot of ifs there, right? Yep. And the pain along the way will almost certainly be very, very, very significant. And the safety of the world will probably decline as well. That's right. Because you're a tree to your corners, yeah.

28:28So it's, yeah, it's definitely a worry. I mean, you have to really get into this stuff. You've got to go back a long way, right? It really goes back to World War II, you know, where it's like Europe was bombed to rubble. And, you know, the US basically, you know, said that we'll be the reserve currency, we'll peg it to gold, you peg your currencies to us, we'll help you rebuild because, you know, our manufacturing base is untouched. And it was all really great. And the downside, it was wonderful for the US in a lot of ways. The downside of it was actually identified by an economist. I forget his first name.

29:07Triffin was his name. And he's got a phenomenon named after him called Triffin's Dilemma. Which is fascinating. And the short version of it is that when you are the reserve currency, you must run a trade deficit to supply the world with your currency. which is great for you because again, you're the only one who can print your currency when you need to. And the US has absolutely been doing that because it's also running a budget deficit at the same time. You have this phenomena where it's like, actually, we don't need to make all of our own stuff. We can print money and we just like financialize really.

29:45And we can just buy it from everywhere else and they'll keep buying it. And by the way, with all the excess US dollars that they earn from their surplus, they'll probably recycle it into our treasuries, which is just another way of saying that will lend us more and more money. And that is why you have the rust belt. That is why manufacturing has been hollowed out. It is because of what happened all the way back, you know, almost a hundred years ago. And the argument is, is that, yeah, it can't go on forever, right? And now it's gone on for a very, very long time and probably gone for a lot longer, But this is all what they're trying to sort of reconcile now really stems from this unique and interesting position in terms of how the US slots into the wider global economy and the trade systems that we've got.

30:31So it's deep, deep stuff. And, you know, is Trump thinking at that level? I don't think so. Yeah, exactly. I don't think so. I'm sure it's not. But I guess I'm just trying to put it out there. The idea of, you know, let's, you know, suspend disbelief for a second. And there is some 4D chess move that is here. It's sort of like there is a wreck. There is – we need to solve for this dilemma. We need to make sure that we have the capacity onshore to do what we need to do. And we will take the pain short term as a consequence of all of that. And maybe that happens. I think that's perfectly – and that's justifiable, I think.

31:10And people say the same when I say stuff, you know, the future made in Australia ridiculous boondogger that the government's putting it forward. well, we should do those things here because it's national security. I'm like, well, if we're going to make our solar panels here, but we're going to keep letting Japan make our cars and China make everything else. Making T-shirts and beer coolers here, no national security angles. But if we do one or two things, but the rest we don't. There's only a justification. If you say there are national security concerns, here are all of the products that we need to make here, and we're going to do it all now, or put a program post, then I'm with you, right?

31:42Not you personally, but them. If you say, well, it's a sovereignty risk. we should make solar panels here are we making the other stuff here no no just this so really what we're saying is if we're doing well with china we'd have no we'd have our own solar panels that'd be great we just couldn't get everything else and that's kind of where that's where that falls down is is if you're saying we've we've done a we've done you know an inventory and we've realized there are 48 different things we need to make here and we're going to either put tariffs in place or subsidize the production whatever it is to do all of those things that i'm i'm not sure i'm with you yet because i still want to make sure that the cost of that relative to the risk we take by not doing it is still.

32:16So there's still a question there. But when you're saying either everything gets a tariff or we're going to make solar panels here, that excuse gets very flimsy to the point of kind of fig leaf territory at some point, I suspect. Yeah. I'm just, as a general rule, and I don't want to make it a blanket statement, but I'm generally nervous whenever any entity, government, and from any stripe or any particular philosophical bent, has it in their head that they need to engineer and orchestrate an economy. I find that, my personal view is that these entities have a very important role in maintaining, they're the referee, they're not the players.

32:55And we need a good referee, right? We need a clear playing field that's even and fair. The rules are well known and even structured in a way that is for our advantage. That is absolutely, I am 100 % on board with all of that kind of stuff. But then when some politician gets it in there, because it sounds good at a first levels and we need to do this yeah and so we're going to redesign the very structure of our economy and how we fit into the global economy even though that we're you know an ant a gnat on the back of an ant on the back of an elephant we're going to do this kind of stuff it's just sort of the road to hell is paved with good intentions right so i'm not i'm not saying that they're evil or they're stupid they're just they're operating within a different incentive structure and their incentive structures get elected i say this people get on board and they but there are real world implications to this.

33:41There are very real world implications to it. And it's just, it's like someone getting up on top of a mountain and sort of saying, I will control the weather. Who's sick of all this rain? Me, right. Let's ban the rain. Yeah. And I'm like, okay, can you? How is that even, is that even feasible? What are the unintended consequences of these actions? Anyway, I just think it always makes me uncomfortable. And again, in defending that standpoint, I just give you history as an example because it generally doesn't work out too well when you try and orchestrate these things from a top-down approach. I largely agree.

34:21You know, I always have different views on this. It depends. I think it's being judicious in the use. Minimum wage, for example, is an intervention in the market. It's not a black-on-white thing. An intervention in the market. That's where it gets silly, where it gets people get black-on. Free markets solve everything. Correct. No, they don't. That's stupid. The government should control everything. No, they shouldn't. That's stupid. So you're right. It should be judicious. And I think your point is, I think where we do agree is, and I think, well, you can tell me I'm wrong, is I'm not a big government guy or a small government guy.

34:53Government should do the things that private enterprise can't do well or properly or efficiently or at a reasonable price. Yep. So it's just, you know, let the market do its thing. And when there are market failures, either make sure those failures are overcome through regulation, as you said, or competition policy, or acknowledge it and go, cool, this is one of those things that we probably should do. We don't have private contractors with competing roads down every main street. I've got the street. If you've got the street at the right, we've both gone the same direction, but one's my road, one's your road.

35:20It makes no sense to have that, right? Speaking of which, people remember the – remember Foxtel and Optus Vision? Rolling out cables on the same power lines? All that stupidity. Anyway, let's move on from that one because we're getting down a bit of a rabbit hole. Oh, I just want to as well, can I just make one quick, very one quick point here. You've got to remember the status quo, the situation we find ourselves in, in terms of where we, like just use Australia as the example, where we manufacture and where we get our goods from. No one orchestrated that other than each and every single one of us.

35:51You, me, everyone listening, everyone in the country, we all just went out into the world with our wallets and purses and we bought the things that were most relevant to us. Yep. And that's how it happened. No one said, hey, we should buy everything from China. Yeah, let's buy everything from China. Screw those guys in Adelaide making the cars. We don't. No one did that, right? Correct. Everyone, it's an emergent property of everyone making an individual decision. And we did it for no grander reason. You know, it wasn't any nationalistic, strategic. It was like, wait a sec, I've got a couple of different options in the marketplace.

36:30this one is cheaper or an end or of a higher quality and suits my needs better. Price, quality, convenience. And you turn around and then for Albo to turn around, no, no, no, they're wrong. They should buy it from here. It's like, yeah, but the stuff that's made here sucks or it's really expensive. Yeah. And I can say that objectively because if it wasn't, people would do it anyway. You don't need to tell people, hey, you should go for the thing that is the best value for you, right? It's the best use case for you. So this is my point. Again, it sounds good, but we arrived at this place because of our own choices and our own choices were perfectly rational.

37:05Now, maybe you want to articulate some grander strategic vision and considerations. And yes, maybe we all, you know, for the greater good, we might need to all make a sacrifice. But just, you know, too many of these things are just too shallow in their interpretation and way too naive in their execution. Yeah, I think that's, yes. Yes. And that's where tariffs, the idea of if we have tariffs for a while, we'll rebuild American industry, and then all of a sudden people will prefer to use that again. Right. It could happen. It could happen. It's possible. It's possible. But to your point, the fact that it evolved, the way it evolved, suggests that there are things, because US industry could have been doing it for years.

37:48Yeah. Why didn't it? Why wouldn't it? Why do we make those choices? I use the example all the time of bonds, right? 75 % of people say, I want to buy Australia made. And then when Bonds made stuff in Australia, they bought everyone else's T-shirts. So Bonds got no... Psychologists call it revealed preference, right? What I say, by the way, it's the same as the elections and Donald Trump losing in the polls and winning at the ballot box. I think we should buy Australia made. Okay. Are you going to? Yeah, I will. Did you? No, I bought the cheap one from Bangladesh. Okay, so Bonds should stay here.

38:19Well, they're not making any money. They're not buying their stuff. None of that's bad. There's a million examples of that. Yeah, correct. It's a million examples. And again, it's such an important point here. Again, there's no agenda, right? And it actually works out really, really well in aggregate when you allow these kinds of things to happen because it is this production that we coordinate through these price signals and our own revealed preference, to use that excellent term, that forces the system to evolve in the way it does. And it's why I, as a nobody, middle class nothing in Australia, live a life that the kings of old could only dream of.

39:07It's because of that, right? And it's a really amazing thing. And those countries and places and peoples that don't enjoy that, it's because of people effectively tinkering with the system, either through corruption or not being able to enforce the rules of the game, et cetera, et cetera, and not allowing people just to do what people will always do, which is, you know, we're as a hairless ape, you know, we're pretty, a lot of ingenuity, right? And we're pretty good at looking, trying to better ourselves. And the best way to better yourself is to provide value to someone else, right? It's really simple.

39:41It's really simple at a ground level. And then, yeah, ideology gets in the way. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener. I want to unpack something. We're 40 minutes in, so let's see how we go. NAB cut their fixed term interest rates for mortgages this week. And it's a fascinating topic because the general view is, NAB cuts rates because it's sure the RBA is going to cut rates in two weeks' time. Yes. Now, that's not necessarily wrong. They may well be prepared to cop a little bit of margin reduction for a bit of time while they assume it's going to happen and still we're talking about it.

40:27So the PR is working for them beautifully. I was talking about radio and TV, I think, this week. So, you know, they get the name in the lights and that's kind of why they're doing it, right? They want some business and they want people to think they're good on rates and all that kind of good stuff. But I wanted to unpack what fixed term rates, both in terms of term deposits and mortgages, are really about. Yeah. Because there's that sense of you're betting against the bank, right? That the bank's making a thing over three years, I'm going to set my fixed interest rate at, say, 5%, just pick a number, at 5%.

40:55And so they're betting the variable rate's going to be higher or they're going to make more money off you, right, than if you had the other way around. That's kind of the general assumption. And I'm sure that, in part, they will, if they do have that view, they will absolutely want to sell more fixed-term mortgages. If we're prepared to take money. Lock it in, baby. Well, banks were offering 2 % fixed rate mortgages for three years back in 2020, right? It was an easy one to do. But it wasn't the banks were being silly. It wasn't the banks were betting against you and they were saying it's going to be lower and you thought it was going to be higher and you did whatever you did.

41:26And I just thought it was worth talking about because what banks really are doing fundamentally is matching. And they're matching for rate and duration. And so what's, I just want to kind of, for people who wonder what's going on here, the bank is not trying to bet against you. They're not trying to beat you. There's no sort of ha-ha, stupid citizen. I'm going to make all this money and take advantage of their stupidity. Now, again, if they could, they would because that's what they do. But the bigger issue here is they're simply matching up their debts with their obligations, with their assets, right?

41:54So in this case, they're saying, well, I can secure three-year funding from wholesale money markets at 2 % so I can afford to give a 4 % three-year fixed-term loan. And that's kind of about as detailed as it needs to be. And just to dig into that a bit, nothing can go, well, let me back let me back up a little bit i was gonna say nothing can go wrong that word quickly yeah yeah definitely things can go wrong um but in theory nothing can go wrong because you're matching the durations the people that you borrowed the money off so you issued bonds nab bonds you can buy them people do buy them not people institutions buy them on behalf of people but they do they buy they say oh okay nab i'll lend you some money what's the interest rate okay great and then nab turns around goes great now i'm gonna lend that money to someone else in fact I'm going to lend that money probably 10 times that money because that's how fractional reserve works.

42:42But I'm going to lend that out at a slightly higher rate. I'm going to make the margin. So again, the thing that can go wrong here is that someone defaults somewhere and things don't match up. But assuming there are sort of no defaults here, it's sort of like, well, the obligation I have as the bank, it's not due for three years. And the people I'm lending the money to, they're locked in for this three years. So it's very different to what we saw with Silvergate and Silicon Valley Bank and other things more recently, where what you had was a liquidity crisis that was basically caused from a duration mismatch, just to take the other side of the point that you're making here.

43:19So you're saying, you know, both of these things are done for three years. Let's just pick that number. So everything's like tickety-boo. When it's just like, well, I have borrowed long, but I've lent short. Sorry, I've let borrow. Let me try this. Sounding like a central bank. On audio. Yeah, that's right. When I lend money to people for a long period, it's like, here's some money, Scott, you don't have to pay me back. You'll pay me back slowly over 30 years. But the money that I have borrowed, people say, no, I want it back now. And in this case, I'm talking about depositors. So you've just less money.

43:51Actually, I don't want to leave my money with you. I want it back now. It's like, oh, but I gave it to Scott. That's right. He's going to pay it back in 30 years. Don't worry. It's good. He'll pay me back, but he's not going to pay me back now. That's when you get into trouble. So just to articulate the point that you're making here is it's like when the banks are just duration matching here. And when they do that, it's just a different proposition. Correct. Lastly put. And so that's kind of – I mean, there's no real so what for investors or even for bank customers if you're a depositor or a borrower.

44:19There is no – not really a so what here. What I think is just what's worth knowing because when you do the fixed turn, I mean, you are kind of, you know, it is a gamble either way because rates can go up and down and you could be better or worse off as a result of accepting a fixed turn. There's an opportunity cost dimension, yeah. Right. So, you know, if you lock in a loan at 4 % and rates get into 2%, you're kicking yourself. Yep. If you don't lock in at 4 % and rates go to 6%, you're kicking yourself. But, you know, it goes the other way around. So, you know, if you do lock in at 4 % and rates go to 6%, you're stoat, right?

44:51So I'm never a huge fan of fixed-term mortgages in particular, fixed-rate mortgages, fixed-term mortgages,

45:04because the bond market set its price based on what it expects to happen. So at some level, you actually are betting, but you're not betting against the bank. You're betting against the bond market because the bond market's like, well, over three years, I want this sort of return because, again, opportunity cost. They're saying, I think my money's better in that particular investment. That's why I'm going to lend it to NAB2 to lend out. So here's my money. Now, you can use that to lend your borrowers as long as you pay me X percent. They would put it somewhere else if they thought there was a better option.

45:27So they are saying over time, here's what I think the average to be. And you can bet against the bond market if you want to. They're not always the smartest people in the room, by the way, so you could even be right. But it's just a reminder that when people look at it and say, oh, the bank's trying to screw me. They're giving me a fixed rate of this instead of that. Or they're giving me a great deal. They're giving me this instead of that. They're just reflecting the pricing of the funding they get from those international or local institutions, as you say, Ram. And that's, yeah, it feels a bit indulgent, so there's no so what.

45:56But just as a takeaway, if you're borrowing money or if you're depositing money, just recognize that's what the maths is. That's what they're doing. That's why they're doing it. They're just simply trying to, you know, they can get some funding and they can then make a margin on that funding by their lending it out. That's why they do fixed term because they've got a fixed term amount of money. It works for them, by the way, because they know, as you said, it's in theory not particularly high risk because you can say, well, it's very low risk in all reasonable circumstances. You know, you borrow it two, you lend it four, you make 2%.

46:24That's a great business. And if you lock both those numbers in - No one's going to call the thing. There's no margin call along the way, I guess, is the way to put it. Exactly. Anyway, so that's just for what it's worth. That's just when you think about that. By the way, really quickly, you mentioned duration matching or lack thereof. Way back, for people who remember the GFC, it's getting very long time ago now, mate. I'm feeling very old. That's when Wizard and Aussie both went broke. Yep. And because they basically are borrowing 30-day money and lending out for 30 years. Yeah. And that's completely fine as long as you can roll over your 30-day debts.

46:54So it's true in 30 days. What you say is, I know I'm supposed to pay you back. Can I have another 30 days? And every other time of the year and the decade, they go, yeah, cool. Here's the new rate, but cool, you can keep it. Okay, cool. Still risking that, by the way, if the rate, they said, well, okay, but it's a much higher rate. Your margin can go pretty quickly. Yeah. Well, these guys were actually doing it as a variable rate. So they could still pass it on, right? So you could lose the business eventually, but it was pretty good. What happened during the GFCs? The credit markets froze up.

47:18At the end of the 30 days, Ozzy and Wizard went, so we can roll it over again, can't we? Can't we? Guys, guys. And their funders said, no, give me the money back right now. And that was exactly what you just said, which is Scott's got the money, he'll pay me back. Ozzy and Wizard are like, but he's not due to pay me back for 30 years and so what do I do now? I love that scene in Chopper with Eric Banner. You know, he's like, when he's after the money, he's like, Chopper, no money. There's no money here. no money here, chopper. And it's like, no, it's not here. And, yeah, the other thing to remember with all of this is that when the bank says these are our assets, they're not talking about something that is, I'm trying to think, more tangible.

48:09It's not like there is a factory or a tractor or a lump of gold. It's a bit of paper, not even a bit of paper. an electronic record that says, Scott, Pinky promises he will pay this back. That's the asset. Now, I'm not saying it shouldn't be an asset. It is an asset, but the asset is only as good as your promise. And you, as a fallible human being subject to all of the uncertainties of the universe in which we live, have made a promise over a 30, well, let's call it 20 year period. Let's be generous. Over a 20 year period. Now, anything could come out of left field and render your promise worthless.

48:43Now, if that happens to Scott, because he's beset by some unfortunate events, okay, that kind of sucks. We've got that planned for in our models. When it happens at scale, that's when you have, that's when, again, chopper, no money. There is no money here. The asset that you're talking about is all these promises. These people cannot keep their promise. And they certainly can't make good on it now. So when the other people say, no, no, but we want our money base like it's not here it's just not there correct so you've you've got to be yeah i just make that point the other thing is as well and i know you sort of said this offhand like where people go oh the bank's making me do this the banks don't make you do anything yeah yeah true you approach the bank i'm the last person in the world to stand up for the banks i think they are literally the last like at the end of the eight million eight billion person line there's andrew i think they enjoy an incredibly privileged position in our society and they exploit that to You know, anyway, I think we let them get away with murder and they should know their place.

49:42Anyway, yeah, but it does annoy me a little bit when someone rocks up and goes, please give me money. Oh, come on, do it, do it, do it. And then they do it. And then the interest rate is changing. Oh, the bank screwed me. I'm like, no, you signed up to this, right? And this is particularly relevant when it comes to a fixed rate, right? Like when you're looking at it, in the same way you're at the shoe shop. Do I get the Nikes, the Reeboks, the hype? I don't know, whatever brands of shoes people wear. What do I get? Get the one that you, but it is your choice. And if you don't like what's on the menu, don't do it, right?

50:24I think too often we see these things as some God-given right that I must have. I'm going to take on this massive multi-decade obligation. and if something goes wrong, it's everyone's fault but my own. Isn't there a degree of sort of saying, well, geez, don't get over your skis here a little? Yeah, yeah. No, to be fair, the banks and their proxies and the middlemen involved should probably be more judicious in their standards, speaking of the GFC.

50:54Am I being unfair there? No, totally. You're absolutely spot on. I think that's – and that's the – that is both the challenge and the opportunity, right? And I think there's – we have allowed ourselves – it gets ideological real fast. Yeah. And it comes down to what degree our banking services are right versus a privilege and to what degree – and we talked about governments just then and how involved they are. At one level, I choose to borrow money from NAB or I choose to put my money in the bank with NAB. Do I really have an alternative option? There's other lenders out there, but, you know, The Australian lenders are a very cozy oligopoly.

51:30There's no cartel behaviour. I don't believe for a second there is, but I don't short of unbanking yourself. You've got to bank with someone. So there's probably an obligation to make sure that, as we said before, there is... You cannot function in modern society without a bank. That is a human right. So in terms of banking, generally, I need someone who's going to facilitate my money transfers, because more money is basically digital at this point. So I get with that. But on the choice to borrow money, that's where I'm a little bit more hardcore. Correct. Again, you can't buy a house without borrowing money, so you would be forever unable to access the housing market if you couldn't borrow money.

52:13But you can borrow within your means, right? Yes, totally. When you say the bank's making me, I guess I'm just saying the society makes you borrow to buy a house. and I'm not absolving people of responsibility I guess what I'm thinking is my general view on some of this stuff is we shouldn't expect nurses and fireys to have a deep working knowledge of the intricacies of the financial system to be able to go to a bank and borrow some money for a mortgage and that's kind of so that's all I mean in terms of yes it's your obligation and responsibility to get it right but if it is such a fundamental part of our society that there is really no getting around it then the provision of that should be governed by enough regulation so that you can't look at someone who borrowed money and say, well, you're the idiot for borrowing the money.

52:57It's like, well, I didn't know what I didn't know. I just don't know what everyone else does. That's the only ad I'd throw on top of yours. No, and that's fair. I'm not – I don't write this in stone, but I'm not entirely convinced that duration matching for mortgages shouldn't just be the standard. Yeah. In other words, if you're a bank and you're going to lend someone money for 30 years, you need to find someone who's going to lend you money for 30 years. And there's markets out there for that. or maybe it's a 10-year-old, a minimum kind of obligation. Generally speaking, when you see major banking crises, it always comes back to that duration kind of problem.

53:31Now, the banks and some economists will argue, no, the economy will grind to a halt if you do all of that kind of stuff. And I just think, no, it still gives people access to credit. It just reduces the fragility of the system. There's plenty of pension funds and institutions that would love to lock in an interest rate over a 10-year period. Absolutely, they would, right? And there are plenty of people who'd like to borrow money. So the market will adapt and evolve for that. And again, it always has. It's the other lesson from history. We look at our particular unique point in time and we go, well, we've done that for the last 20 years.

54:02That's just how it is. Well, no, things have always evolved, right from the early days of Venice, when the modern system really started to take hold and to where we are today. Oh my gosh, there've been all kinds of innovations and evolutions and it always sort of happens. And so again, it's all made up, right? It's all in the heads of these hairless apes. We can change it if we want. And so we have made a devil's bargain in a way where we kind of say, listen, we are prepared to take a more fragile system, which could really upend and impact lives very tangibly and in a very real way. Because we feel, rightly or wrongly, that that will help stimulate further economic growth.

54:44And I always think that I'm the last person I want to stifle growth, but I do think that the relentless blind pursuit of growth at the risk of stability and longevity isn't always a good thing. You can have a little bit of your cake and eat it too here. It's not like, no, pure hard money standard. You can never do anything, never lend money out. No, no, no, no, no. Absolutely you can. But there's an ocean of gray between those two extreme points there. And I would imagine that that we would you say that we have to borrow to have a house well that never used to be the case it is the case now because we've engineered it that's what i'm saying yeah this unintentionally yeah yeah yeah and maybe we've we've painted ourselves into a corner where there's no way of getting out with some really painful reset but i just i guess i just i just put that out there as as like it doesn't have to be this way we could very much choose to have more robust safer systems are not in a situation where to buy a house, you and your partner have to work for 45 years and borrow all the money off your parents, you know, and never, ever, ever miss a beat along the way.

55:53It just, like, it didn't ever used to be that way. Correct, correct. It's crazy. Mate, let's finish off with something I wanted to... There's a bit of a bit of argy-bargy in the Fairfax papers over the past few days. Professor Richard Holden, who works at the UNSW, penned an article on the AFR yesterday, so Wednesday, bagging Ross Gittens. Now, that's a brave thing to do. If you come at the king, you best not miss. Right? It's an unusual thing to go for. And Richard is actually a nice guy. And I think I find the public spat when it gets sort of that. He said this and this is ridiculous, kind of a bit much for that sort of stuff.

56:30There's other ways to do it. I don't mean to bag Richard here. I'm just, you know, there are better things to do. But also Richard felt attacked because he's an academic economist. And Ross Gittens, I actually probably agree with Ross. I'm on Team Ross on this one. And generally, not always, but pretty generally. Yeah, me too. He basically, so I'm just going to read just for fun. So basically, and we've talked about this a little bit, I think, in the past. I'm really, really, really concerned that the number of students studying economics and the number of girls studying economics in particular have plummeted over the past 10 or 20 years.

57:04And the type of economics that they're studying, but let's put that aside. Well, so this is kind of – maybe that's the point, right? Well, that's what Ross Gittens is saying. So he says – I'm just going to quote a big chunk of it for fun. I'll try and do it reasonably. He says, quote, but I think I know the biggest reason. The economists have lost the plot. Now, quick brackets here. That's exactly very radical for people like Richard Holden. Quoting again, since not long after the end of World War II, academic economists have been engaged in an all-consuming quest to make their discipline more intellectually, quotes, rigorous, end quote, by making it more mathematical.

57:43Their concepts of how the economy works must be expressed in algebraic equations, not diagrams of demand and supply curves, nor, heaven forfend, mere words. They must build ever more elegant, and in bragging quotation marks, econometric models of the economy, which could at last spit out reliable forecasts of where the economy is headed. Except they've proved just as unreliable as economists' predictions have always been. beat me to it I'm going to describe because it's again it's it's true that when you express propositions as equations any logical faults in your reasoning are exposed but this greater rigor comes with a big proviso the reasoning is completely logical given the assumptions on which it is based if your assumptions are hopelessly unrealistic however fancy your mathematics sorry if your assumptions are hopelessly unrealistic sick comma however however your fancy mathematics is logical but sadly astray i got thrown with the plural of mathematics there whether your prediction came off the top of your head or from a model whose maths is beyond the comprehension of almost all of us it's still the case of garbage in garbage out end quote um read the whole thing it's a great article it's on the smh i don't think it's it might be um actually it's such it's he must have had so much fun writing it one more one more quote quote the remarkable thing is that the failure of mathematization to improve the The economist's understanding of how the economy works has done nothing to dampen their enthusiasm for more maths, end quote.

59:11Ross has just gone, you know, done a wonderful job. He's not the first person to make that point. Well, we have come in the past, and I'm not going to use the court of authority to say Ross agrees with me, but I'm just saying Ross agrees with me. He goes back decades. It does. This argument has been going on and on and on. Even Nobel Prize winning economists have made this point very strongly. It's called physics envy, you know. It's sort of like they looked at the sophistication and elegance of physics and what the language of mathematics revealed, which is the language of nature. And we thought, whoa, I love that precision.

59:47And it just doesn't work in these social sciences. Or it doesn't to the degree of precision that people assume that it does. And it's, again, I'm very much on Team Ross here. So it's not, anyone can have a view, but I think when you survey the historical record, it's just sort of, again, well, if it was good, then how come your predictions are always wrong? Like at least 80 % of the time they're wrong, right? Like that's the tell. So I would have a lot more, I would have a lot, look, if we had these philosophies and theories and models that was just sort of like, gosh, they're not perfect. I mean, how could you expect them to be perfect?

1:00:26But gosh, they're really reasonable. They always directionally right. They tend to really sort of see around the corner here and give us clues as to what. Never, like almost never. And when that does, it's like, well, you'd put that down to random chance. Like, you know, the broken clock's going to be right twice a day. So I'm very firm on this kind of view. What I love about Ross is that he's not a trained economist. Yeah, yeah. He was a journo and he taught himself. Yes. And he did so by just being super curious and reading a lot. And this is the thing. I hate this credentialism that's crept into society that you don't have a piece of paper from some institution, you don't know what you're talking about.

1:01:07You, dear layperson, you can read all the books you like. You can do all the studying that you want. Unless you have this piece of paper, your opinion does not count. And that's BS, right? Like it's complete BS. it's sort of like and that is that is something when I was at at high school my economics teacher made us read Ross Gittins that's how long Ross has been doing I know I'm no spring chicken right I went to his HSC preparation lecture at University of New South Wales oh wow really yeah sat at the back with a mate of mine we watched Ross do the here you get ready for HSC economics he was the best teacher like he just like here's an article that Ross has written let's chat about it it's like oh my gosh you know and we learnt some of the fundamentals I never went on to do it at any higher level of education but as listeners know I'm just fascinated by this stuff so I do read a lot about it so I'm probably trying to defend my own ego here more than anyone else but what I love about anyone I don't care what your background is a relentless curiosity, an open-mindedness a preparedness to change your mind a preparedness to let the facts sort of reveal themselves and have the evidence sort of push you in a certain direction as opposed to rigid ideology which is unfortunately pretty pervasive in some of these academic institutions.

1:02:21I just feel as though, you know, someone's ego has been bruised. They're lashing out and they're relying on titles,

1:02:33on credentials to sort of do the arguing for them rather than the merit of the ideas themselves. Yeah, correct. You know, I just think it's – and again, we've got to be – like with everything, there's nuance, there's context. It's not to say that there are no formulas in economics that aren't worthwhile. There are some good ones. But we have kind of figured out the big ideas. Adam Smith, 300 years ago, figured out the big ideas. And we've really been arguing about the finer details in the point. So I think where a lot of these people go wrong, it's in like some obscure, asinine component of the economy, which is really – and maybe there's still room for debate in those areas.

1:03:23But the things that matter is my personal view is the really big things that matter here are unchanging. You can debate certain things. You can't debate something like supply and demand. Yeah. You can debate, gosh, really quirky trade theories and the rest of it. But when it comes to the role of prices in an economy, that's undebatable as well. People will buy less at a higher price and buy more at a lower price oil speed. There are some things like that. And the interesting thing is, and this is where I'm, as you know, and now I'm very partial to the Austrian view of things. And there's actually very few models in all of that.

1:04:11It just sort of derives logically from a few broad axioms. You know, if this is true, this is what naturally follows. Whereas I think where the more academic sort of version of things tends to be is sort of like, here's a model that works. and now I'm going to try and fit the world to the model rather than the world to the – rather than the other way around. Yeah. Does that make sense? Totally. And that's exactly Gittins' point is the models are – the great Latin phrase I learned, I didn't learn any Latin except for in economics, ceteris paribus, all else being equal. In other words, the things that aren't in the model, I just assume don't impact the model, which is stupid.

1:04:50It's absolutely crazy. And I think you're over the physics envy. I think it's partly that. I don't even think it's – my wife's in education and I'm not going to speak about education because I don't want to A, drop her in it and B, I don't have expertise in that area. But you end up with the sort of people you attract make the rules that suit their personality types. And the problem for economics, I think to get to this point, frankly, is the more mathematicians go into economics, the more maths gets taught in economics, the more it attracts people who like mathematics and economics and around and around it goes.

1:05:23I mean, that's entirely where behavioral psychology was born because behavioral finance was born because it was like classical economics doesn't describe these things. The rational humor, it starts with people will act rationally. That's the very start. It's like, have you met a rational person? I mean, Spock was pretty close in Star Trek, but other than that, there's no Vulcans I've met on Earth. The reality is people aren't that way inclined. We're not rational. So when you start with the model, say, oh, this is what happens. Yeah, people do this. Right. People will always do this. And we've made the point before.

1:05:55Economics is far better at describing than about predicting. And describing, as to Ross's point, what if you just look at supply demand curve, actually just describe it in words? Here's how people act. Here's what people do. It doesn't mean you don't use academic rigor. If you can prove a thing, prove a thing. Some of the great behavioral psychology, behavioral finance tenets have come from controlled experiments, which is great. We see how people act and go, okay, that seems to be what happens, rather than alpha plus beta plus gamma plus delta equals whatever. that you don't need an equation for that stuff.

1:06:26Sometimes it can be useful to describe some things. And again, this is where Ross was, I wouldn't say tongue in cheek, but he was having a bit of fun and kind of, you know, going on a ledge. I'm sure he would be saying, you know, things can't be described. Some of the great, you know, maths of GDP, remember, is it? Oh, I can't remember. You remember the imports minus exports plus growth plus wages, whatever that is. I can't remember what it is now. I've lost it. It's funny. That's just directionally true as a way of describing it, Try not to put it in maths, therefore the answer is 3.16923. That's the problem.

1:06:57I came across this really awesome quote in the week. I'm halfway through writing my update for this weekend, and I love it. It's from a guy called Justice Oliver Wendell Holmes. Oh, yeah, yeah. And he said, we need education in the obvious more than investigation of the obscure. And I just thought, that nails what we are talking about here. And this is the great irony of economics. It's the simplest ideas that are the most difficult to accept. The law of gravity doesn't change based on how I feel about it. And neither does the law of demand. So I can have an interesting idea about some obscure little edge case of economics and we can talk about and it's fun.

1:07:41But when prices rise, demand falls, that's a law, right? Like it's closest to a fundamental law of the universe as you can get in this kind of sort of discipline here. And again, the idea is what Holmes was sort of getting at here. We spend way too much time discussing these really arcane, weird, obscure kind of things when it's just like we really should be talking about the really obvious kind of stuff, the real fundamental stuff, because that's what moves the dial. That's what shapes the economy. And that just means that's what sort of shapes our society and our general standards of living.

1:08:18But we do not talk about it. The best example, just to come full circle on this pod before we finish it off, the best example is tariffs. Here we are talking about, the whole world is talking about tariffs, you know, as if it'll do this, it'll do that. I would put that into, that is a classic example of needing education in the obvious. That is that prices going up will generally be bad for consumers. That's it, right? And it's like, and yet, and yet, here we are in 2025. Well, maybe this and maybe that. And I was like, oh, my goodness. Like this is stuff that has been bedded down and worked out a million years ago and it is still being tossed around, which is so frustrating.

1:08:58Because if we could only get – if we could accept certain fundamental truths here and we could, I guess, help those ideas percolate more widely, I just think the world would be so much of a better place, right? Because there are – these aren't just the idle navel gazings of academics. These are the arguments on which the rules of society are based. And it impacts all of us, whether you're a billionaire or a peasant, right? Correct, correct. Again, I'm probably sounding a bit hyperbolic here, but I genuinely - It does impact us to different degrees. Yeah, it does, right? But, you know, it's sort of like, generally speaking, when someone - You know, it's the same thing.

1:09:39You will see it every time in the media. Like, say, there's a drought, right? or there's a blight that wipes out half of the bananas in Queensland and prices go up. Oh, the supermarkets are like, what? Of course they went up. Like whatever you think, there are just less bananas in the world. They are scarce and now they are much scarcer. Now, we can either allocate the scarcity by decree, by committee, by bureaucracy, or we can do it by prices. Now, we've seen what happens in the former. We have bread lines and everyone's dirt poor. Or we have another one where we miss the fundamental importance of that price going on.

1:10:21I don't like paying more for my bananas. But I tell you what, when someone comes in and goes, you know what, you can't charge more than a dollar for a banana. Anyone who has the capacity or interest or inclination or ability to grow bananas, stuff that, I'm not growing bananas. And so the very act of those prices going up is what encourages more supply and is what corrects the situation. Just as when we start producing a bunch of stuff that no one wants, what do we do? We put it on sale and we clear the stock. And that sends a massive signal to the other half of the economy. You're like, oh, gosh, maybe we should make less of this stuff.

1:10:56Right. It is so critically important, and yet any piece of major economic legislation that is discussed at the federal or state level seems to – it reveals an ignorance of that one very basic fact. Rant over. Rant over. Well, suspended. Rant suspended. Until you put some bait in front of me. Which I will avoid doing so we can wrap this podcast up because there are other conversations that we start with a question or a comment that go for another 25 minutes. And I will avoid doing that because we've had a fun, long, and appropriately reasonably long podcast. We won't go any longer other than to say, no, I'm not going to go through anything, Ram.

1:11:36Bitcoin, property, banks, no. But I will say that if you do want to have us touch on, answer, discuss a topic, a question, an idea, an issue that is on your mind, please let us know. Challenge. Order challenge. Challenge. There we go. Yeah, I love it. Bring it on. That's what I'm talking about. I'm kidding. you can email us info info at fool dot com dot au I haven't given the socials out for a while so jump on to Twitter and go to at sage underscore simian for Ram's Twitter account or at strawman invest you can grab me on Twitter or Insta or blue sky it's getting it's kind of picking up a little bit catching on not sure how it's going to keep going but it's there now I'm just simply tmf scott p on all those platforms or you can get me scott phillips money on Facebook Until we meet again, and preferably this Sunday, if Andrew has finished his feats of endurance and strength, we'll talk to you then.

1:12:27Fool on. Cheers.