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Fed Confused Reality Doesn't Conform To Its Economic Models, Shocked Its Models Predict "Explosive Inflation"
Below are several excerpts only the brains of those practicing the world's most useless profession (and we are very generous with that assessment) could possibly come up with, in attempting to explain the shocking outcome of reality continuously refusing to comply with their exhaustive and comprehensive Dynamic Stochastic General Equilibrium (DSGE - don't worry: it sounds complicated - it must be very serious and important, and be thus very credible and good at predicting stuff; it is neither) models.
- With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy—a phenomenon we call the “forward guidance puzzle.”
- New Keynesian DSGE models following the work of Christiano et al. (2005) and Smets and Wouters (2007) are in principle well suited to study the e ffects of forward guidance
- While the literature has provided strong theoretical justi cations for the use of such forward guidance (e.g., Eggertsson and Woodford (2003)), the evidence on the quantitative eff ects of such a policy tool on the macroeconomy is scarce
- Empirically, Gurkaynak et al. (2005) and more recently Campbell et al. (2012) found strong evidence that FOMC announcements move asset prices. Yet when Campbell et al. try to assess the impact of exogenous anticipated changes in monetary policy on the macroeconomy, they find that this has the opposite sign than expected, highlighting these identi cation challenges.
- Given that policymakers seldom if ever experimented with forward guidance this far in the future, there is little data to guide them.
- The problem, however, is that these DSGE models appear to deliver unreasonably large responses of key macroeconomic variables to central bank announcements about future interest rates (a phenomenon we can call the "forward guidance puzzle")
It gets better:
- In general it will always be hard, if not impossible, to test the predictions of DSGE models by looking at the outcome of policy counterfactuals such as the ones in our paper: even if the counterfactual is implemented, this will not occur in a controlled environment.
- Nonetheless, we argue that counterfactuals like the one performed here are useful for policy makers in order to quantify the potential e ects of their policies, particularly when alternative approaches are lacking as is the case here.
The problem is that the results the Fed's own models predict, fail to comply with the resultant reality:
- Our proposed solution to the "forward guidance puzzle" is based on the realization that the apparently straightforward experiment "let us fix the short term interest rate to x percent for K periods" has implications for the short term rate that go well beyond the K-th period in medium scale DSGE models.
- As a consequence, these counterfactuals appear to have an over-sized e ffect on the macroeconomy.
- We view the implications of these experiments of short term interest rate in the far future as incredible. They are at odds with both common sense and the empirical evidence of the eff ects of announcements
Yes, it is ironic that the Fed is talking about "common sense", we know. But the absolute punchline you will never hear admitted or discussed anywhere else, and the reason why the Fed can no longer even rely on its models is that...
- Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters. This is an unsettling fi nding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.
In short: the Fed's DSGE models fail when applied in real life, they are unable to lead to the desired outcome and can't predict the outcome that does occur, and furthermore there is no way to test them except by enacting them in a way that consistently fails. But the kicker: the Fed's own model predicts that if the Fed does what it is currently doing, the result would be "explosive inflation."
You read that right: if Bernanke does what he not only intends to do but now has no choice but doing until the bitter end, the outcome is hyperinflation. Not our conclusion: that of Smets and Wouters, whoever they are.
And these are the people who are now in charge of everything.
Full paper from the NY Fed:
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Hope that explosive inflation isn't going to be like projectile diarrhea...
"Clean up on aisle 5 please."
Why not? If it were then it would get like 6 bazillion views on YouTube.
No worries. They're on top of it already. Wall Street destroyed V with their "securities" so the Fed is making it up in M. What the hell could possibly go wrong?
Care for a Skittle?
The only way to win against a central bank is to sell perceptions on the rips, buy necessity on the dips. Forever.
can't happen...just ask the MMT guys..quantity is just an option...print away
Always the inflation story.
Never the deflation story.
Take a look at oil - it appears to be leading the way - lower prices are symptomatic of deflationary times.
http://bullandbearmash.com/chart/spot-wti-oil-daily-october-03-2012/
That's because inflation is the devil we know.
Have a nice death-spiral.
That is because the deflation story is an empty book that has yet to be written (if it ever is), while the inflation story has dozens if not hundreds of chapters crammed-full of the most sordid and diabolical events, and represents the entirety of the last 70+ years of monetary history.
elections coming up... major efforts at keeping gas down, though in my experience it's damn high. Heating oil looks like a new high cost for the season.
I love deflation. But then again, I don't have much debt. What's your excuse?
The Fed is the ultimate doomsday machine. Funny thing, they don't even realize they are sending us into the sun. But they are insane.
OR they entirely DO realize it...
Just like the Coyote, the Fed can't look down for fear of falling.
BTW, cause it needs to be said after reading bits and pieces of that:
Zero Hedge, Bitchez!
Fucking A: the blind are in charge, the poor are growing, entitlements are exploding, and the metals are just beggining their climb. Hop aboard!
At best this demonstrates gross incompetence of the Fed. At worst it's a plot to CAUSE hyper inflation and destroy the USD. How much more of an indictment need there be when the Fed ignors the predictions of their own models?
That is fucking amazing.
Looks like its time to slap a few more variables into the ol' Universal Simulator. I mean, jeez, lived reality can't have more than a few thousand independent parameters. Can it?
And their 'forward guidance' riddle is laughable. Do they even know about human communication?
Central Banker: "things are pretty tough right now so we're going to keep rates at 0 for a good long while, so rest assured."
Everyone else: "Wow! Things are so fucked up and the Bankers have no idea when they are going to get better. I'm going to be safe and just keep my money in my pocket."
Central Banker: "OK, in light of continued uncertainty we will extend the zero rate even further."
Everyone else: "Shit, it must be getting worse. Time to buy all the real goods I can so at least I'll have some food and fuel."
Central Banker: "No one could have foreseen this hyperinflation!"
Insane.
These "models" are why economics should have little to nothing to do with math, which Mises knew in 1912.
Real economics is Austrian economics, the rest is just a cover-story for stateism.
What I wish Ron Paul had done in his fifty chances to grill Bernanke.....rather than go into a long winded four-minute fifty-nine second lead-in to an obscure point missed by most, Paul might have asked:
You have "dueling mandates" of price stabiity and full employment. Since the beginning of Qe in November 2009, all but the most sycophantic economists say inflation is 6%, though the breathing and eating public would say it's even higher, and the total number of employed Americans---"employed" means they have jobs, in case you were unaware of the definition---is 1.2 million LESS than when you started printing money. That's "oh for two" Fail and fail. Does your PhD and your "models" allow you to see your efforts as wrong, pointless, or counterproductive, or are you Einstein's Idiot who thinks it just hasn't been enough and doing the same thing will now suddenly work?
Former Rep Alan Grayson could have asked this question with both charts and his disconcerting grin.
The most valuable thing I have learned about economists is that they should ALWAYS be viewed as politicians in disguise.
Economics is driven by ideology, not fact, and tries to disguise this fact under multiple layers of obfuscating mathematics. Utter nonsense such as "dynamic stochastic general equilibrium" is so effective as a tool of confusion that even economists themselves lose sight of the fact that they are primarily driven by faith rather than fact.
Economists pursue "political correctness", defined as that which empowers the chosen. They are not "scientifically correct" defined as that which results in greater comprehension of reality.
"General equilibrium" is a great example of that. This has no basis in reality. Complex systems do NOT tend towards equilibrium, they are covered by non-equilibrium thermodynamics which allows for internal potentials that provide the capacity for work. Economists would have you believe that predators and prey naturally tend towards an equilibrium state, because they have faith in this concept based on an instinct that it seems correct, fueling an ideology of Social Darwinism / Lassez-Faire capitalism. Actually bothering to observe nature makes it abundantly clear that this is bullshit. Booms and busts are the natural way, the opposite of what most economists think.
They're so confused that reality doesn't conform to their faith in general equilibria that they prefix their nonsense with "dynamic stochastic", meaning changing and random which is a quaint way of saying "we have no fucking idea what we're doing". Economists love to invoke the stochastic element as a catch-all clause whenever their models don't work out. "Seven sigma events happening all the time? Oh that's just due to the stochastic element and we can ignore it". Actual scientists (rather than pretenders), would instantly reject such a model.
But economists don't care about facts. They decide what they want to believe first (faith), then dress it up in mathematics to make it appear legitimate. They are no different to the chief-priests and shaman of old believing that a special dance can make it rain and dressing up their faith system in a complex set of rituals to make it seem legitimate while empowering the "chosen".
But economists don't care about facts. They decide what they want to believe first (faith), then dress it up in mathematics to make it appear legitimate.
You could say that about most people, believing what they want to believe, ignoring facts that contradict their beliefs.
It's easy to ignore facts. Just ignore them. Refuse to acknowledge them. Or acknowledge them but twist them to support your belief.
It's how most people are, not just Washington & Wall Street.
You could say most people have an agenda, some belief that doesn't jive with reality. Perhaps several beliefs that don't jive with reality.
On the other hand I think most of these people know what reality is. They know their unrealistic beliefs are nonsense. But they don't care. They benefit in some way from their unrealistic beliefs, and that's all they care about.
Economists parroting the QE mentality know what the end result is. They know the Fed is looting the wealth of the nation, giving it to Wall Street and the government. They know "helping the economy" is just a cover story. They know hyperinflation and impoverishment of the people is the result.
But parroting the QE mentality makes them "politically correct", allowing them to keep feeding at the government trough. They benefit from parroting the QE mentality.
Most people would be the same way. Most people would sell out their priniples to feed at the government trough, and millions do, from bureaucrats to cops to contractors to welfare recipients, millions of Americans are selling out their principles to feed at the government trough.
It's why I believe America isn't worth saving.
You're dead right about people.
Unfortunately.
I still sometimes wonder what became of all those new $100 bills that were "Defective"?
Hyperinflation? The ZOMBECONOMY marches on. #Forward
ZH found an economic paper with the word 'inflation' in it so here it is ...
Good grief! ZH is either a fool or a tool.
Maybe 'Tyler Durden' is someone at JP Morgan-Chase. Seems like it.
Fascinating that this is released for public discussion. Anybody smell a bottom in -- as Kyle Bass would put it -- "Anything you can tack down?"
It's creepy, the amount of time that some analysts take to arrive at the simple conclusion that tossing confetti and being the best / only customer running up a tab at your own lemonade stand is no way to run an economy.
econ phds are all like this. dumbasses.
Here's Paul Krugman, trying to explain why deflation is bad. Hilarious--and the comments, not surprisingly, are even funnier...
http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad
Funniest unreported news is ECB making 45.5 billion yesterday.