James G. Rickards is the editor of Strategic Intelligence,the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellersCurrency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

• The fatal conceit of central bankers…
• A hair-raising admission you weren’t meant to hear…
• Then James G. Rickards reveals the idiotic mathematical mumbo jumbo Janet Yellen relies on to set Fed policy…

Central banks operate under the false belief that they can fine-tune economies. If things get too hot (inflation), they dial down the thermostat. If things get too cool (deflation), they dial it up.

But reality is quite different…

The economy is not a linear system that can be adjusted like a thermostat.  It’s a complex dynamic system, more like a nuclear reactor.  Once it starts to melt down, no amount of playing with the controls can stop it.

The world is sinking into recession, dragged down by sagging growth in China.  Meanwhile, central banks are fiddling with the thermostats by printing money.

James Rickards has had private conversations with central bankers for years in which they admitted they had no idea what they were doing. They have described monetary policy to me as an “experiment” (their word, not mine). They didn’t use the phrase “guinea pig,” but that’s how they treat investors.

But until now, He has never heard a Fed official admit this in public. At this point, the whole charade is too obvious to deny. Reuters has a story on a central banker speaking on the record admitting they are making up policy on the fly. And don’t really understand how the economy works today.

Today, Jim Rickards reiterates his forecast — Janet Yellen will not raise rates this year. I said that categorically in late 2014. It wasn’t a wild guess. And he is not making a wild guess this year, either. Read on below for the math that backs up his forecast…

The one equation that shows why Yellen won’t raise rates: [S2=S1(1-S1)r]…

Yellen’s (Federal Reserve Board) Feedback Loop

What is popularly called a “feedback loop” is technically known to applied mathematicians as a recursive function. In plain English, the output of an equation becomes the input for the next iteration of the same equation.

Running numerous iterations of the same equation with computers, “numerous” can mean millions of times. And when computers produce graphical representations of the outputs, one gains insights into the nature of the process represented by the equation.

Some graphs move to a value and stay there forever, what complexity theorists call a “fixed point attractor.” Some graphs are utterly chaotic.

Some others replicate almost mystical patterns at increasing and decreasing scale, such as the famous scale-invariant Mandelbrot set, shown below.

Each graph reveals a different dynamic.

A simple, but useful version of this is the equation S2 = S1 (1 – S1) r.

If you set values of S1 = 0.75, and r = 0.1 and solve for S2, the result is 0.01875.

Next, take this value for S2, and plug it into the right hand side of the equation in place of S1. Then solve it again to get S3.

Repeat the process (each output = next input), and you’ll observe an interesting phenomenon.

The graph of the outputs moves to zero and stays there forever. There is no escape from the feedback loop. Zero is the fixed-point attractor.

While mathematics can be an end in itself, one purpose is to provide models of real-world dynamics in ways that help one understand those dynamics. Recursive functions (a basic tool of complexity theory) are useful if one sees capital markets and economic processes as complex dynamic systems.

In fact, capital markets pass the four tests of complex systems — diverse agents, connectivity, interaction, and adaptive behavior — with flying colors. Complexity theory is a far more useful way to understand capital markets than the obsolete, and ultimately harmful stochastic equilibrium models in use for the past eighty years.

Those stochastic equilibrium models assume complete markets — a grossly false assumption — and are unable to account for the extremely nonlinear dynamics of economic phenomena. Willem Buiter of the London School of Economics has described this type of macroeconomic modeling as “a privately and socially costly waste of time and resources” that “may have set back by decades serious investigations of aggregate economic behavior and economic policy-relevant understanding.”

What does this mathematical digression have to do with Federal Reserve interest rate policy? The issue is whether the Fed, by intervening in markets to a greater extent than ever, has created a feedback loop between itself and the markets from which there is no escape.

The Fed policy rate has been stuck at zero for seven years. For the past two-and-one-half years, the Fed has expressed its desire to raise rates. But “desire” is not analysis, it’s wishful thinking. Analysis reveals that whenever the Fed talks tough on rates, the dollar strengthens, the U.S. imports deflation, exports slow, the economy weakens, and the Fed is ultimately deterred from pulling the trigger on a rate hike.

Then the Fed goes dovish. This happened in September 2013 when Bernanke shocked markets by not starting the taper.

It happened again in September 2015 when Yellen shocked markets by not raising rates. This surprise was followed by a dovish press conference, more dovish minutes, and super-dovish speeches by Fed Governors Lael Brainard and Dan Tarullo.

Markets then rallied in anticipation of continued zero rate policy. This stabilization caused the Fed to go hawkish again. You get the idea. Wash, rinse and repeat.

Based on the October employment report, market expectations of a rate hike in December are at the highest level since the “taper tantrum” of May 2013. Now it’s November. Fed officials are reading the market rallies as an all-clear sign and are signaling that the rate hike is back on the table. But markets (at least for the moment) have had a different reaction from a few months back.

The dollar is still strong, and emerging markets are still in the doldrums.

They’re reading the new Fed hawkishness as a sign of economic strength and bidding up stocks even with cheap money while it lasts. The dollar is still strong, and emerging markets are still in the doldrums.  A December rate hike might be a done deal in a linear system where good news is followed by good news in ways easy to extrapolate into a predictable outcome.

Yet, in complex systems with recursive functions, good news on employment can turn into the bad news of a strong dollar, imported deflation, slower exports, etc. in ways we’ve seen before. That’s the feedback loop at work. In fact, the strong October employment report finds little confirmation in other data. On balance, recession indicators still have the upper hand.

Can the Fed break out of this feedback loop just by raising rates without regard to economic fundamentals? Not really. Raising rates into weakness will amplify the weakness, and force the Fed to cut rates in 2016. It’s back to zero with greater amplitude.

Central banks operate in the false belief that they can “fine tune” economies. If things get too hot (inflation), they dial down the thermostat. If things get too cool (deflation), they dial it up. The reality is different. The economy is not a linear system that can be adjusted with a thermostat. It’s a complex dynamic system, more like a nuclear reactor. Once it starts to meltdown, no amount of playing with the controls can stop it. A global recession has begun and central banks are fiddling with the thermostats by printing money.

James Rickards has had private conversations with central bankers for years in which they admitted they had no idea what they were doing. They have described monetary policy to me as an “experiment” (their word, not mine). They didn’t use the phrase “guinea pig” but that’s how they treat investors.

The only way out of this systemic feedback loop is to alter the system. This cannot be done with monetary policy. A structural problem requires structural solutions. These involve fiscal, and regulatory policies within the purview of the White House and Congress. Given the current political dysfunction in the United States, there is no prospect of that.

Perhaps Yellen will raise rates in December. But I doubt it.

Her equilibrium models tell her one thing.  But the complexity models used by James Rickards tells another.