The View From 1776

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From Thoughts from the Frontline - What Has QE Wrought?
By John Mauldin | Dec 21, 2013

And what are they [the Federal Reserve] telling us about the future they have planned? It is going to turn out extremely well, they say. As a group they are forecasting economic Nirvana by at the end of 2016: a 3% GDP growth rate, 2% inflation, and a 5.5% unemployment rate. What would you expect the Fed funds rate to be in such a world? Might you assume that you would at least get some inflation premia?

Think again. They are forecasting a median Fed funds rate for 2016 of 1.75%, which is a 0.25% negative risk-free return!

I have highlighted in the past how truly abysmal the models are that the Fed uses to forecast economic conditions. It is almost statistically impossible, as numerous researchers have documented, to do as badly as Federal Reserve economic forecasts have done, although the Office of Management and Budget and other congressional forecasters give them a run for their money. The latter have the partial excuse of being economists employed by politicians. The Fed has no such excuse. Their models are just plain bad.

Posted by .(JavaScript must be enabled to view this email address) on 12/24 at 05:29 PM
  1. And who, pray tell, has a better model? Who can we point to and say, "Wow! Their crystal ball got it exactly right!"

    Who predicted that inflation would be close to zero after five years of heavy quantitative easing? (Certainly not this blog.)

    Posted by .(JavaScript must be enabled to view this email address)  on  12/31  at  04:09 PM
  2. J. Jay,

    Even a cursory fact check shows you are clueless as to inflation, what it means, and how much of it there has been in the five years you claim was “close to zero”. If you’d bother looking it up, you would see CPI has risen from 212.193 to 233.069 since Obama took office. When you divide the latter index by the former and do the conversion to percent gives a total inflation of 9.83%. While I agree that is relatively low, it is still substantial. It is also but one measure of economic wellbeing; and its ‘advantage’ depends in large degree on context (i.e., there are times when inflation is positively beneficial and too little of it is a bad thing - same is true of deflation). Had you argued inflation is ‘currently low’ or that we ‘have had four straight years of low inflation’ you would have, at least, been on a factual footing. But, that was not what you argued by giving the whole period as your basis for “close to zero”. The only time inflation was close to zero was for several months at the start of Obama's reign, and before the Fed had taken any action (either way) to correct it. BTW, inflation for 2013 was 1.24% (and rising), which is substantially greater than zero given the historical average is 3.22%

    Some other important metrics (or proxies) for economic wellbeing include: level of unemployment, cost of living, growth (GDP), balance of payments (trade balance), savings (i.e., personal wealth accumulation), exchange rate (currency flow), quality of life(style), quality of surroundings (aka, environment in which we live), health and education. By most of these measures, we (at least in this country) have it better than any previous generation of humans – bar none. Yet, in a few of these measures we are not doing especially well just now. I might have included the old ‘misery index’ (U3 unemployment added to inflation), but that really doesn’t really track all that well with economic uncertainty other than as a potential and is too subject to manipulation. There is one other metric I would add to this mix except it is difficult to measure; and that is the level of economic anxiety. Possibly we could devise some kind of media rating for it; one that counts the number of articles written and TV segments devoted to uncertainty each month. What we believe our economic state to be is at least as important as our true monetary situation as that is what most people act on.

    You are easily impressed by Obama’s slow yet steady recovery and assurances of a low rate of inflation; and I am disinclined to dispute those just now. What, then, of our ‘economic emotional’ state however? The country as a whole lacks anything like the economic confidence of even the Bush years (which weren’t very exciting). One huge difference between Obama and the Bush years is ‘confidence’, and that is because Obama keeps changing the rules. When you don’t know what the rules will be from one month to the next, it is very hard to plan. Bush, at least, gave us some assurance his ‘game changes’ would be kept to a minimum; which freed us to that which we do best – produce. Uncertainty, then, more than any other single factor is holding this economy (and this country) back at present. Even Obama’s anti-business climate, destructive healthcare mandates, a$$ backwards energy assumptions, ‘climate saving’ gimmicks and punitive tax schemes are less intimidating than the constant uncertainty he generates through never ending rule changes and capitalist ‘witch-hunts’.

    If it were just about inflation or about recovery, I might find some ground for agreement with (or, at least, less opposition to) policies that limit growth. But, as those are blind to all the other things involved, and are incapable, as a matter of directed policy, to give the right impetus in the right direction in all but coincidental moments, I cannot. No economy is as simple as economic models lead us to suppose, and the more honest among the modelers tell us right out their models ought not to be taken as bases for policy; that they are but the rudiments of understanding. Yet, that is what every politician does thinking it makes him superhuman (or dispels a perception of incompetence). A handful of economists, however, do believe they are sufficiently knowledgeable and brilliant to manipulate markets beneficially; especially those who are thrust into the limelight and called on to perform miracles. Between politicians hankering after legitimacy and economists encouraged to over-reach, the temptation to play god is just too great.
    Posted by .(JavaScript must be enabled to view this email address)  on  01/07  at  07:03 AM
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