Thursday, September 19, 2013

Economy: The Fed Surprise & Heisenberg´s Principle

(Drivebycuriosity) - Life is full of surprises. Yesterday the financial markets got caught off guard by a "surprising" decision of Ben Bernanke and his Federal Reserve Bank.

The monetary authority declared that they will continue their massive stimulus program QE3 for the time being. Pundits and markets had expected that the Fed will begin to phase down QE3 this month and will announce this taper yesterday.

The alleged start of the tapering was already priced in the financial market prices. It has been expected that the taper will rise U.S. interest rates and therefore slow down the global economy. As a response to the "Fed surprise" stock markets and currencies of emerging markets rallied, interest rates and the exchange rate of the U.S. Dollar fell.

What can we learn from this unexpected event? I like to remind that surprises are a normal and a stable part of life.

1. The future is unknown. We cannot foresee events. Therefore the flood of news we are receiving day for day are usually unexpected and surprising.

2. We cannot read the mind of others. We don´t know what they are thinking, we have no idea what goes on in there mind. Therefore decisions and behavior of others are very often unexpected - and surprise us.

It seems that the majority of pundits and investors thought that the Fed will respond to the news that the global economy is getting better. Therefore the market (the sum of all investors)  believed that QE3 will end now. But Bernanke & Co. think otherwise. Yesterday the Fed declared that the economic upswing, especially on the job market, is not strong enough to taper QE3 now.

3. Many events are random, they occur by accident. This is well described in Quantum Physics. Experiments have shown that the behavior of particles like electrons is unpredictable. This could be related to the famous Heisenberg Principle, named after the physicist Werner Karl Heisenberg:  "The more precisely you know the position of a particle, the less precisely you can simultaneously know the momentum of that same particle" (physics).

I guess we can generalize this theorem for the whole economy. We don´t know enough about the world around us that we can make sucessful predictions. Hence many events and decisions by the economic policy maker will surprise us.

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