EC Same Country, Different Worlds

To my mind, “reflation” has always proceeded under false pretenses. This goes for more than just the latest version, as we witnessed the same incongruity in each of the prior three. The trend is grounded in mere hope more than rational analysis, largely because I think human nature demands it. We are conditioned to believe especially in the 21st century that the worst kinds of things are either unrealistic or apply to some far off location nowhere near our experience.

In economic terms, what is really a technocratic ideal hasn’t helped with this confirmation bias. The Fed is staffed with the best and the brightest, supposedly, so there is no way the economy could stay down forever. Even if they managed to screw up time and again, eventually they will have to get it right. The same kind of sentiment is applied to other central banks whether they ever deserved it or not (even the BoJ).

Within this paradigm, what the Fed in particular, is doing now makes it all the worse. There is a great deal of misunderstanding about what these “rate hikes” mean. There is none about what they are supposed to mean, which is the successful completion of years of monetary “accommodation” that greatly aided in bringing about full recovery. But that is not what is going on here. It is vastly different, a fact that doesn’t seem to have registered in all that many places. I wrote the day the FOMC voted for the last one:

The intersection of the modeled path of the long run economic trajectory with that of the dramatically reduced federal funds rate is the Fed essentially declaring that the economy we have today is the best then can do; this, under these orthodox terms, is it. Even if it means Industrial Production declining for fifteen straight months, that is not something the FOMC means any longer to fix. The committee just voted to tell you that it no longer believes that doing so is its job. If we are in a depression, as IP for consumer goods as well as the related denominator for the unemployment rate show, then there is nothing the FOMC can do about it.