Thursday, June 19, 2014

The Fed is a Dictatorship of Dangerous Cool-Aid Drinkers

By David Stockman

he Fed’s so-called DSGE (dynamic stochastic general equilibrium) model should be smashed into bits and dumped into the dustbin of history. In today’s release everything is the same—–above trend economic growth for years into the future accompanied by below target inflation, full-employment and sub-normal real interest rates as far as the eye can see.

Except…except for 2014 real GDP, which is already -2% in the hole after the impending further markdown of Q1 results. Accordingly, economic growth for 2014—-the year that “escape velocity” was a sure thing—has been marked down by nearly 25% since last quarters outlook, and at downwards of 2.5% is a pale comparison to the upwards of 4% projected as recently as Q4 2011.

The Fed is a dictatorship of dangerous Cool-Aid drinkers. To every question about obvious structural failures in the US economy such as the drastic rise long-term unemployment and labor force dropouts and the anemic level of business investment in future productivity and growth—which has been at deeply sub-historical levels since 2000—-Yellen had

a ritualistic response: All the bad stuff is due to the fact that the cyclical path of the US economy has fallen short of the DSGE prediction for 5 years running, but all those failures will automatically fix themselves once the economy gets back on the Fed’s perpetually limp hockey stick!

Never has one person talked in so many circles in such a short period of time. In truth, the Fed’s new chair is an appallingly na├»ve and simple-minded paint-by-the-numbers Keynesian. She will lead the Fed right into the jaws of the next bubble smash-up, and as one wag put it, no one will even bother to leave the room.

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission. 


  1. In Wednesday June 18, 2014 marketplace trading, Nation Investment, World Stocks, Junk Bonds, Emerging Market Bonds, and Emerging Market Local Currency Bonds, soared to new highs as investor continued risk on investing and pursuit of yield investing on Janet Yellen comments.

    Investors drove Equity Investments strongly higher on comments from Janet Yellen on the lack of any over valuation, by rebounding economic activity, by the expectation of economic expansion to proceed at a moderate pace, and by the recent inflation data as heading towards the Fed’s target.

    Reuters reports Fed Keeps Faith In Recovery. At an afternoon news conference, Fed Chair Janet Yellen provided a long list of reasons for short run confidence, from resilient household spending to an improving jobs market. Though officials slashed their growth forecast for 2014 from 2.9 percent to a range of between 2.1 percent and 2.3 percent, Yellen said that was the result of "transitory" factors like a severe winter and that a rebound was underway.

    "Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace," she said. "The economy is continuing to make progress towards our objectives" of full employment and 2 percent inflation”

    But Yellen said there had been "a slight decline of projections pertaining to longer term growth" that prompted Fed officials to lower their view of the expected long-term federal funds rate from 4 percent to 3.75 percent. That is below the 4.25 percent historical level identified

  2. but all those failures will automatically fix themselves once the economy gets back on the Fed’s perpetually limp hockey stick!

    It all sounds so New Agey! Is Yellen going to done a crown of flowers and worship flying saucers next?