Does Anyone Understand What's Going On?

I've been working on a hypothesis, but I'm having trouble making it testable.

You may recall that while no scientific hypothesis can be proven, it can be tested to see if it can be disproven. My hypothesis is that the world is run by fools. I'm having trouble formulating it in a way that can be disproven.

It would be simpler to form a hypothesis that most TV announcers, analysts and commentators don't know what they are talking about, especially (but not only) concerning economics.

This evening we were told by ABC that Standard and Poors' downgrade of the US Government's debt rating caused the stock market fall and that the remedy is to get Congress back and do more cutting of expenditures.

Wrong!

If S&P's action had any effect at all, it should have driven up interest rates on US Government T-Bills and Bonds, as lenders insisted on a higher rate as a cost of borrowing. In fact, the rates have gone down, indicating a flight of capital into the very instruments S&P downgraded. The world still sees US Treasuries as the safest harbor for capital.

So what did cause the fall in the stock market? Evidence suggests that after last week's debt limit deal, some investors recognized that the deal included no measures to increase aggregate demand or otherwise get a sluggish economy moving. Furthermore, it appeared politically impossible to take any positive action because of Republican intransigence.

It may be that program trading caused even more of a decline.

What I heard on ABC tonight was pretty consistent with Paul Krugman's description of the prevailing "stupid narrative." Here it is:

"August 8, 2011, 2:51 pm

The Downgrade Doom Loop

It’s not the whole story, but something like this threatens to develop:

1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

2. Fears that this austerity will depress the economy send stocks down

3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

4. This leads to calls for even more ill-advised austerity, which sends us back to #2

Behold the power of a stupid narrative, which seems impervious to evidence."

This isn't rocket science, but it IS very different from managing a household budget.

First: Spend money to put people back to work. That will actually reduce the budget deficit in the short to mid term.

Then: Fix the long term problem by paying for the programs the people want!

I say: let the Bush tax cuts expire - if need be, for everyone.