The 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 naïve 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.
In any event, the following chart posted on Zero Hedge says it all.
