FED'S MODELS ARE EMPIRICALLY FALSE

The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not. Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments. Fed’s models are empirically false. Equilibrium models like the Fed uses basically say the world runs like a clock and occasionally it gets knocked out of equilibrium. And all you have to do is tweak policy or manipulate some variable to push it back into equilibrium. They treat markets like they’re some kind of machine. But Twenty-first-century markets aren’t machines and they don’t work in this clockwork fashion. The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system. The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship. James Rickards tries to put the record straight.

- James Rickards

The market’s in a highly unstable state right now. These violent swings show the inadequacy of the standard models that the Fed and other mainstream analysts use.

The Fed assumes so many things about markets that are simply false, like that markets are always efficient, for example. They’re not. Under volatile conditions like these they gap up and down — they don’t move in rational, predictable increments like the “efficient-market hypothesis” supposes.

The problem is that the Fed’s models are empirically false. Studies have proven how faulty their models are. The Fed has the worst forecasting record in the world. It’s basically been wrong every year since 2009.

Equilibrium models like the Fed uses basically say the world runs like a clock and occasionally it gets knocked out of equilibrium. And all you have to do is tweak policy or manipulate some variable to push it back into equilibrium.