Tuesday, October 14, 2014

The Day Monetarism Died

We are undergoing a paradigm shift in conventional wisdom regarding macro-economics.  For the last 32 years, the conventional wisdom has been that we can manage the economy via central bank tinkering with interest rates.  That view is no longer plausible.  Continual lowering of interest rates plus the "extraordinary" measure of quantitative easing, has only proceeded to still lower inflation rates -- in direct opposition to the conventional wisdom.

18 months ago I moved the bulk of my lifetime savings to longer term U.S. Treasury bonds.  I did this in response to conventional wisdom that inflation and interest rates were certainly on the rise.  6 months ago, the conventional wisdom was unanimous as expressed here -- http://blogs.marketwatch.com/thetell/2014/04/22/100-of-economists-think-yields-will-rise-within-six-months/ - " a survey of 67 economists this month shows every single one of them expects the 10-year Treasury  10_YEAR  yield to rise in the next six months."

Well I was right and the 67 economists were wrong - big time. Interest rates have plunged over the past 6 months -- almost 6 months to the day since this was published.  The conventional wisdom is the utter fantasy that the central bank can control the economy.  The central bank said that the economy was improving and that their policies would generate inflation.  But they have been proven wrong time and again, and this last episode will be the last hurrah of these Oz-like wizards