The Fed Placebo Effect: This Stuff Might Actually Work

by: Mark McHugh

Wikipedia says:

The placebo effect occurs when a patient takes an inert substance (“a sugar pill”) in conjunction with the suggestion from an authority figure that the pill will aid in healing and the patient’s condition improves. This effect has been known for years.

This is great news! You see, if the patient (our economy) thinks an expert is treating him, he’ll get better. Thank you Dr. Ben. Can I get a Hallelujah? Can I get a Booyah?

Don’t get me wrong, a rate cut is not as benign as a sugar pill. Rate cuts make more money (sounds good), more money gets everyone excited (borrow and spend), good times, good times. There’s just one catch, because all the same stuff is worth more money, that means our money is worth less. How much less? The Fed won’t say how much money they are printing, so that’s anyone’s guess. The important thing is it makes us feel richer. Arise and walk!

The other cool thing about a collapsing currency is it makes anemic investment returns look robust, as long as you don’t compare them to gold, oil, or other currencies. Maybe the guys at Goldman will get those $500,000 bonuses again after all. They deserve it, right? Anyone who can spin crap into gold is worth it.

The astounding thing about placebos is that they actually work, given certain circumstances. The patient must believe he is being cured and not harmed. The patient can’t suspect he’s been given a placebo. When they administer placebos in tests, not even the people dispensing the pills know if they are real or not. It seems the test subject will sense that he is being duped and the effect doesn’t work. When the Fed announced the 50 basis point rate cut the commentators on bubblevision were exuberant (maybe even irrationally so). Hmmmmmm…….

So how are you feeling, today?

Somewhere, there must be a line between good medicine and quackery. There are probably some doctors out there too enamoured with the placebo effect. A placebo might do the trick if your patient has a cold, acid indigestion or depression (did I just use that word?). But I’m thinking that if you are looking at a diabetic with a broken leg and gangrene setting in, a sugar pill might not be the best call.

When I think about the mortgage mess, the credit crunch, and this M & A free-for-all, I think we need a sheriff more than a doctor. But so far, Dr Ben is the only one who showed up for work, and he’s got a suitcase full of pills to stop the bleeding. By the way, has anyone seen the sheriff?

Maybe I should just shut up and take my medicine. My stocks are up. Maybe this stuff works after all.