It looks like the market hopped back on the bullish path.

At least for the time being.

The Bank of Japan’s (BOJ) promise not to hike rates during unstable market conditions settled down the crowd. And since it was their hike that delivered the instability in the first place, BOJ rate hikes are effectively off the table.

Now, they certainly want to hike, if only to prove they can free themselves from the trap of their own making.

But they can’t.

Their efforts to revive a dying economy—a shrinking population, very little immigration, too many old people—did nothing more than provide cheap funding for the hedge funds to which they are now beholden.

Since the late 1990s, the BOJ has tinkered with the Japanese economy, thinking they knew how to work it through Quantitative Easing.

Instead, they fell victim to the central flaw of central bankers—the fatal conceit.

Which I can illustrate best through the following story.

Reality 101

Imagine, for a minute, sitting in a classroom.

Not just any classroom. But a cavernous auditorium-style room. The type that college freshmen at a big state school pack into for entry-level classes.

You know, classes like Chem 101, Econ 101, Calculus – big ones like that.

You’re here to watch an engineer give a lesson on how to disarm a nuclear bomb. Now, I have no idea why you decided to show up, but here you are, sitting in the auditorium, watching some old guy at the top of his field tinker with the guts of a thermonuclear warhead.

The room is packed and dead quiet, aside from the sound of pneumatic wrenches and drills as Mr. Engineer presses on.

Every now and then, he pops his head up to offer comments on his progress. But, just now, you hear him mutter a curse to himself while a bit of smoke rises from his position behind the bomb.

A quiet, steady beep can now be heard, and the audience gasps.

Hearing your collective concern, he pops his head up one last time and, with a flat expression on his face, says calmly, “I think I now understand how little I know about what makes this thing explode.”

This is precisely what the BOJ economists should be saying to themselves right now.

“It is difficult to get a man to understand something when his salary depends upon his not understanding it”

Friedrich Hayek – or, as I like to say, the free man’s economist – once said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Unfortunately, central bankers imagine they can design economic equilibrium (price stability and full employment) through interest rate manipulation.

But the economy isn’t an engineering problem. It’s a “reality of life” problem.

Like the mystical goddess Isis, the economy’s inner workings are veiled, subtle, and infinite. You can’t understand her with an engineering mindset. You can only appreciate that her process involves the hundreds of choices billions of individuals make each day.

That process doesn’t fit into an economic model. It doesn’t respond well to control.

But the BOJ central bankers can’t learn that lesson because their paychecks depend on them not learning it.

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Think Free. Be Free.

Don Yocham, CFA

Managing Editor of The Capital List