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Discussion: (3 comments)

  1. Maybe I am just stupid, but it seems to me that interest rates are unnaturally low because of Fed policy, so how can we believe that the Fed’s belief of a 1.75% “neutral” rate is any more correct than an arbitrary 2%?

    American’s have had their savings accounts robbed because bank interest is below 1%, even on CDs, while real inflation is much higher than the government’s artificial published rate.

    My point is simply that government is interfering with all economic indicators,even including farm commodities and the economic growth rate through government excesses. Pointy-headed professors should understand that the free market has left us.

  2. The following quantities are political estimates, projections, derived from surveys, proposed but unmeasured, and/or derived from extending past charts into the future:

    -> Neutral real interest rate, Inflation, Output gap measures, Potential growth rate, Risk Aversion, Precautionary saving, Unemployment rate, Slack, Historical trend of employment-to-population ratio.

    The following is derived from one or more theories about how the world should be different than it is, without assurance that anything will be better:

    -> Target interest rate

    === ===
    [edited from above] The proposed rule says the neutral real rate is 2%. Most evidence suggests it is now lower. The Fed believes that the neutral real rate will rebound to 1.75% in the long-run, but suspects it will remain substantially lower for some time.

    Our analysis suggests that, due to the fall in the economy’s potential growth rate, the higher cost of financial intermediation, increased risk aversion and higher precautionary saving, the neutral real rate will remain closer to 1.0%.

    There may be more slack than the unemployment rate and most output gap measures suggest.
    === ===

    This is a complex stew of estimates and largely unknown variables. Any suggested policy will be carried out with political manipulation and uncertainty, as in the past performance of government. This analysis is one step above reading the patterns in chicken bones thrown on the ground by a Voodoo priest.

    Don’t take my word for it.

    ( )

    Frank J. Tipler is Professor of Mathematical Physics at Tulane University.
    ** Macroeconomics is Astrology, Not Science **
    === ===
    [edited] Our leaders are being advised by macroeconomists who haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.

    Science is about prediction and precise explanation. It is not enough to construct a different explanation about each past event. Science must produce a consistent, precise explanation for all of the relevant past events.

    Then, real science predicts the future and is testable according to those predictions. If a “science” cannot predict what will happen, then it is clear that it does not understand enough about what is going on, and of course it is of no practical use in arranging for a better life.

    Real scientists bend over backwards to make their data, methods, and results available for review and criticism. This corrects for personal bias, and allows for quickly sorting out the truth. A true scientist tries to examine all possible explanations for his results, before believing that his new analysis is correct.

    You often hear about a supposed scientist withholding data or methods. He may complain that it is beneath him to release data to people outside his field, or complain that he has no time to give information to his critics. This is an indication of a closed mind, or someone afraid that his results won’t survive review. It is the mark of a pretend scientist who cannot be trusted.
    === ===

    The ability to predict what will happen from following pre-defined rules is the essence of science and knowledge. The inability of macroeconomics to do this is evidence of cult, not science. The shaman says he is particularly able to interpret the signs and do the right thing when the rules fail.

    We rightly object to the idea of pervasive central planning. Why should we be happy with central planning of the value of money, assets, and the cost of loans?

    The common desire of governments is to steal through inflation. It reduces real government debt by collecting a hidden tax. The only fear is that big inflation (say 6+%/yr) will upset the peasants. So, theories are welcomed which can do inflation targeting, just enough and not too much. It is just a waste, from the FedGov view, to have inflation of less than 2-3%. They could be stealing more, up to the “inflation bound”.

  3. It seems as if the Fed is using software similar to that used by the AGW kids. It was first developed in the back rooms of Enron.

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