The Federal Reserve Relies on a Flawed Economic Model

By Lacy H. Hunt, Ph.D., Economist

In May 22 testimony to the Joint Economic Committee of Congress, Fed Chairman Ben Bernanke issued another of many similar positive interpretations of central bank policy. Yet again, he continued to argue that quantitative easing has decreased long-term interest rates and produced other benefits. He called economic growth "moderate," a term that he has often used without acknowledging that the Fed's forecasts have repeatedly been far above the mark. Within less than two months—or by the time of the July FOMC meeting—the Fed had downgraded the economic growth to "modest," tacitly acknowledging that program of open-ended $85 billion purchases of government and federal agency security purchases had failed to boost economic activity.

The Fed's polices have not produced the much-promised re-acceleration in economic growth. In the first half of 2013 as well as the latest four quarters, the real GDP growth rate was a paltry 1.4%, even less than the 1.9% growth in the 13.5 years of this century, and less than two-fifths  of the 3.8% GDP growth rate since 1790. Only growth in the 1930s was less than in the 2000s, a time when Dr. Bernanke played a major, if not dominant, role in monetary policy decisions. Continue reading "The Federal Reserve Relies on a Flawed Economic Model"

POLL: Where Does Your Money Go?

It is hard not to be a sore loser in today’s economy. We pay more money for less gas. The prices on groceries have risen, while the value of the dollar has fallen. The unemployment rate is still high, and many of us owe more on our homes than they are worth.

So, how do you think we can turn this economy around? Perhaps we would all like to believe in Bernanke’s theory of Wealth Effect. (“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”) However, that doesn’t seem to be happening. So, when do we stop trying to help the economy by buying, buying, buying, and start keeping ourselves safe by saving?

How will you help to turn this rocky economy back into a well-oiled machine?

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As usual, we would love your feedback and insight. Let us know where your money is going in the comments section.

The MarketClub Team