What Do Unprecedented Fiscal & Monetary Policy Mean?

There are no hard feelings with investing. Making predictions is hard. The goal is simply to avoid making the same mistakes. If you’re going to be wrong, at least do it in a new way. The chart below looks a lot like the market’s historical predictions of the Fed funds rate. The market constantly predicted hikes too early last expansion; we think it’s making the same mistake this time. There won’t be any hikes through 2023 if the Fed gets its way.

This chart looks just like those wrong predictions, but it’s a different metric. It shows the historical debt to GDP predictions by the CBO from 2007 to 2021. The black line is actual results. The CBO has dramatically underestimated the growth in the debt to GDP ratio which is quite scary now because the CBO is currently predicting it to increase over the next 10 years.The recent trend in the past 12 years has been for it to increase during recessions and not fall during expansions. Of course, the CBO can’t predict recessions, so it is usually wrong before them. Due to the new popularity of MMT and the aging population, we aren’t holding our breadth that the debt to GDP ratio will fall from 2022 until whenever the next recession hits.

The Details

We are in a new world where monetary and fiscal policy are extremely easy. In theory that should create a lot of inflation even with tough demographics. It’s possible recency bias is making people not believe in the inflation story These are unprecedented policies; using the recent past to gauge your thinking might not work. The top chart on the left is one of the best charts we’ve seen in measuring this unprecedented policy response.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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