Submitted by David Stockman – The Contra Corner Blog
Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments.
My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing.
Notwithstanding the most aggressive monetary stimulus in recorded history—-84 months of ZIRP and $3.5 trillion of bond purchases—–average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.
What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter.
Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy——up an astonishing 5.5X in the last two decades—– imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely.
Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature. Continue reading
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