In recent years, there has been a plethora of claims regarding the effectiveness of monetary policy, often lacking critical examination. A common approach among policymakers is to highlight an improvement in economic indicators, such as unemployment rates, to take credit for these changes. However, the diminishing print media seldom challenges these dubious assertions.
It’s essential to remember that just because one action precedes another, it doesn’t imply a causal relationship. A classic example of this logical fallacy is the post hoc reasoning: “after this, therefore because of this” (post hoc ergo propter hoc).
For instance, a policy advocate might state, “Gross domestic product has increased,” suggesting that the quantitative easing policy was effective. While this could be true, it is equally possible that the GDP growth would have occurred regardless of such measures. Without a control group and holding other variables constant, it’s impossible to definitively attribute economic outcomes to specific policies.
A significant misconception in our era is the belief that government officials and academic experts hold sway over the economy. The idea that their positions grant them the power to dictate economic outcomes is far from reality.
Creating jobs, reducing unemployment, and increasing GDP are all claims made by the President or central bank leaders, yet they have minimal direct control over these factors.
Wandering Off Script
While policymakers can implement strategies to temporarily inflate economic metrics, the underlying market dynamics eventually come into play, leading to humbling outcomes.
Occasionally, a member of the financial elite diverges from the official narrative, revealing the underlying uncertainty about their own methods. At Economic Prism, we appreciate these rare moments of honesty.
For instance, Stephen D. Williamson, Vice President of the St. Louis Fed, recently published a white paper entitled “Current Federal Reserve Policy Under the Lens of Economic History.” In this document, he critiques various policies.
“Williamson believes that the zero interest rates set since 2008—intended to stimulate healthy inflation—have inadvertently caused the opposite effect,” reported CNBC. “He argues that the ‘forward guidance’ employed by the Fed has only muddied the waters, confusing investors. Furthermore, he posits that quantitative easing—characterized by monthly debt purchases that inflated the central bank’s balance sheet beyond $4.5 trillion—has at best a tenuous connection to genuine economic recovery.”
If zero interest rate policies, communication tactics, and money creation have not enhanced the economy, what purpose does the Fed serve?
The Fed’s Edifice Crumbles Away
“The main area where quantitative easing appears to have had a positive effect is in the stock market, with the S&P 500 showing a 215 percent increase since its lows in March 2009. In other sectors, however, deflation concerns have escalated and interest rates remain low.”
From our perspective, the Fed’s sole success seems to lie in inflating the stock market to unsustainable heights. Presently, this artificial structure appears to be fraying; for example, the DOW has recently plummeted by 1,360 points—over 9 percent—since mid-May.
The downturn in the stock market also seems to be accelerating. Just yesterday, the DOW fell by 358 points, indicating broader economic challenges.
Dr. Copper, often viewed as a leading indicator for economic activity due to its extensive industrial use, is showing signs of concern. An uptick in copper prices typically correlates with increasing economic activity, while a drop suggests stagnation. So, what is Dr. Copper signaling now?
“Copper futures closed at a more than six-year low on Tuesday,” reported MarketWatch, “as concerns over demand from China dragged down many metals, including gold.”
According to Dr. Copper, we may be facing a turbulent autumn ahead. Oil prices could potentially fall below $40 a barrel. Let’s hope the Fed refrains from making any drastic missteps.
Sincerely,
MN Gordon
for Economic Prism
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