[Federal Reserve Chair Janet] Yellen
said at least one thing of importance last week.... She confessed to
the frightening truth that the Fed formulates its policies and
actions based on forecasts of future economic developments. [Unfortunately] our monetary politburo couldn’t
forecast its way out of a paper bag.... [I]t’s inherently
impossible to forecast the economic future, but that is especially
true when the forecasting model is an obsolete Keynesian relic which
essentially assumes a closed U.S. economy and that balance sheets
don’t matter....
[T]he economy is now seamlessly global,
meaning that everything which counts -- such as labor supply and wage
trends, capacity utilization and investment rates and the pace of
business activity and inventory stocks -- is planetary in
nature.... Nevertheless, Yellen & Co. are obsessed with
the immeasurable and largely irrelevant level of “slack” in the
domestic labor market. They falsely view it as a proxy for the
purported gap between potential and actual GDP. Not
surprisingly, they are now under the supreme illusion that the labor
slack has been largely absorbed and the output gap nearly closed. So
they are raising money market rates by a smidge to confirm the U.S.
economy’s strength and that the Keynesian nirvana of full
employment is near at hand....
[I]n today’s world of global labor competition in goods, offshored
business services, episodic domestic gigs, temp agency labor
delivery, and Wal-Mart style labor scheduling by the hour and time of
day, week, month, and season, the whole idea of “full employment”
is a relic.... [Labor distribution factors] shift and morph steadily over
time and in response to new technological and cultural developments.
They are utterly beyond the reach of 25 basis points of interest rate
shifts on the money markets. So the unemployment rate tells you
almost nothing useful. By contrast, there are an immense number of
leading indicators which track the global credit bubble and false
boom it enabled. They bear far more directly on the main street
outlook than does the Fed’s primitive bathtub model of the US
economy.
-- David Stockman (The Daily
Reckoning) Dec. 22, 2015
