In response to an FT Blog by Larry Summers on 15th June 2017, entitled ‘Five reasons to doubt Yellen and the Fed’s wisdom’
“While I do not believe the Federal Reserve made a serious mistake on Wednesday in raising rates, I believe that the “preemption of inflation based on the Phillips curve” paradigm within which it is operating is highly problematic. Much better would be a “shoot only when you see the whites of the eyes of inflation” paradigm of the kind I have advocated for the last several years” - Larry Summers
The models that the Fed works with represent the pinnacle of econometrics, not to mention the wisdom of Nobel Prize winners. The problem is that a) they don’t measure any of the real world factors that they purport to, and b) they erroneously describe and predict the relationship that those factors have with each other.
Statistics like ‘employment’ and ‘inflation’ have been badly tortured until they give the ‘right’ answer - The CIA could learn a lot from the Bureau of Labour Statistics. Thanks to these geniuses and the political operatives who spin their number crunching, it’s now possible to have about 100 million Americans without a job but only a 4.3% unemployment rate. Well it’s one of the reasons…another is that when a guy takes three part-time jobs to make a living wage…they count that as three jobs. But I’m nit picking now…
Having watched the press conference, luckily the effects of Dr Yellen’s mind numbing drivel are ‘transitory’ even if the effects of her policies are not. Fortunately, ten minutes playing with a dog or talking to a 3 year old is enough to restore faith that there are still sentient beings on the planet.
In short: a) the goals are misplaced b) Fed models do not represent the economy, which is a complex system not an equilibrium machine, c) the academics who stumble from one crisis to the next do not understand money, banking, capital formation, human behaviour or interest rates…and d) they lie every time they open their mouths – forward guidance is an economist’s version of propaganda – it represents not what they think, but what they want us to think they think.
In Janet Yellen’s favour, I personally believe that she is more honest, less egotistical and far less ‘political’ than the previous favourite for the job - Professor Larry Summers.
Finally, for anyone interested in far more insightful perspective on the economy…below is a link to an interview with Steve Keen, the ‘Aussie rebel’ Professor of Economics at Kingston – one of the very few academics who predicted the financial crisis (clue – his models include ‘money’ and ‘banking’).