Friday, January 16, 2015

The Conventional Wisdom

In my previous post, I noted that something seems to be horribly wrong, in that 100% of economists were completely wrong in a prediction last year.  And now professional forecasters on Wall Street are unanimous in seeing U.S. equities climbing by the end of this year, by an average of 11%.  Let's dig a little deeper to see what is wrong and why.

My initial thought is the "professional forecasters on Wall Street" are hacks.  They are boosters, and should be ignored.  While this is true, there are two more fundamental factors:

  • It would be extremely risky for a professional forecaster to go against the conventional wisdom.  
  • It is not only "professional forecasters on Wall Street" who have been dramatically wrong about the economy, but also the professionals in government including, especially, the Federal Reserve.
No one in the "financial establishment" has explained why the disinflationary trends of the past 30 years should be expected to turn around.  The obvious driving force is globalization and the accompanying weakening of the bargaining power of labor.  The Fed ignores this and believes that their ineffective monetary policies will result in a return to "normal".  The Wall Street forecasting professionals repeatedly predict a return to "normal", again ignoring the ongoing fundamental weakness of labor.


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