# Ben Bernanke’s Pseudo Logic

The Dow is still climbing. It poked further into record territory. Gold did nothing.

What to make of it? Be cautious, dear reader. This is the most manipulated market in history. It could go up higher, much higher. But you can’t trust it.

Did we finish explaining how the world works?

Probably not. We probably forgot to explain it. Or forgot how it worked…

We took up the question on a long walk down the beach.

‘You’re not disputing the importance of Aristotelian logic, are you?’ Elizabeth asked.

‘No. It’s very useful to approach problems in a logical and rational way. But if you have a neighbour who is making noise late at night, you have to use something more than just logical and rational thinking.

‘You have to use your brain. Logic will tell you that you need to do something to turn the music off. That is a simple problem. You could solve it in several ways. Even a robot could solve it. Call the police…break into your neighbour’s house and turn it down yourself, or possibly just ask the neighbour to turn it down himself.

‘All of those ways might work. Logically, you will select the one that involves the least expenditure of energy on your part with the most likelihood of success. That could be as simple as taking out a shotgun and blasting your neighbour’s electrical box. Or maybe whacking the neighbour himself, so the problem goes away forever.

‘Is that a good idea? Logically, the answer is ‘maybe’. Because you don’t know much more about the future. And since you don’t know what will happen…no one does…your decision should be based, logically, on only what you do know – which is that the noise will go off.

‘But here’s where you have to use your head. We follow rules that aren’t necessarily logical but that make civilisation possible. ‘Thou shalt not shoot up thy neighbour’s junction box’ is not necessarily logical. But it is nevertheless a useful guide to noise abatement issues.

‘These rules evolved over a long period of time… each one of them distilled from the rich juice of mistakes, corrections, and experience of many generations that came before us. We ignore them at our peril.’

‘But you can perfectly well incorporate the lessons of history in your rational analysis,‘ countered the distaff, and wiser, half of the Bonner household. ‘You don’t have to rely on an illogical ‘thou shalt not.’ You can just think it through.’

We didn’t answer. Most people will think she’s right. You can try to think it through. You see a banana peel on your front step… and you can see a lawsuit heading your way. You take the banana peel off…and you probably have made for a better future.

But there are many things that just don’t allow such simple analysis. We probably chose a bad example, because on the noisy neighbour level, you can have a reasonable shot at knowing what is going on.

‘Thou shalt not drop money from helicopters,’ is probably a better prohibition. It is not logical; we don’t know exactly what outcome it will produce. And, logically – or at least pseudo-logically – if people don’t have enough money, it seems to make sense to give them some.

Bankers regarded it as a rule…the evolved wisdom of the banking trade…discovered by trial and error over many centuries. Many times they tried printing money. Never did it produce anything but misery.

You could find a similar rule in the stock market. ‘Buy low, sell high.’ It’s a rule…backed by long experience and bitter setbacks. It’s illogical, in the sense that you never know. As far as we know the stock market will push even higher.

According to the most serious academic work, we never know whether prices are going up or down. And when they’re going up, we feel a huge emotional tug to get in on the trade…we don’t want to be left behind. But the rule tells us to do something else.

Will obeying the rule protect us from losses? We don’t know. But if we could know, we wouldn’t need the rule.

It’s not that Aristotelian logic isn’t useful. And it’s not that you can build a bridge with old wives’ tales. You can’t. But they each have their own limitations. Don’t try to romance your girlfriend with logic. And don’t try to go to the moon on instinct and intuition.

Regards,

Bill Bonner
for Markets and Money

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