Since these people get paid a lot, have PhDs and might even be smart, how is it that they are so wrong, and have been now for five years running? There is a simple answer: They are operating on a business cycle model that is utterly erroneous and obsolete; and which therefore distorts and obfuscates the ‘in-coming’ data and the inferences and forward expectations that they derive from it.
In a word, their father’s business cycle model was premised on a “clean balance sheet” world driven by main street borrowing. In fact, however, we have now passed through the “peak debt” horizon and are in a bubble finance world driven by Wall Street speculation. That passage changes everything.
To be sure, the old fashioned main street cycle was the work of the Fed no less than today’s. After all, the business cycle itself is essentially a product of central banking.
Indeed, central banks function akin to the 12-year old who killed his parents and then begged the court for mercy on the grounds that he was an orphan. That is, they inherently generate credit inflations and the resulting economic boom and bust—–only to then claim indispensability in reversing the recessionary slump and avoiding a plunge into depressionary darkness.
But there were some big differences between then and now. The Fed of yesteryear was reactive, prudent and pre-Keynesian. It occasionally raised interest rates to “lean against the wind” in the event of too much economic boom and rising inflation; and it moderately lowered rates and loosened monetary conditions once inflation had abated and idle labor and capital resources had become too large. But mostly it was a passive watchman.
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