Optimistic Pessimism

Oct 16 2011 @ 7:14pm

Yes, it's come to that. Money quote:

In considering the path of future output, the question is: what's demand likely to do? My sense is that it's likely to rise slowly, at or just below real potential growth plus an inflation rate around 2%, which is probably all the Fed will tolerate. But we have no guarantees about that, and we certainly can't take much comfort in the low level of sales in housing and durable goods. They'll grow as quickly as the Fed allows. Should the Fed make an error of some sort, they'll fall with demand and the broader economy.

We should keep the Depression foremost in our minds. When systematic policy error results in low demand, it's as likely that the error will be sustained or compounded as it is to be rectified. In such cases, every bottom is ephemeral, and there is no darkness that can't grow darker still.