The Deeper Red Of The (False) Dawn

The concept of an economic “false dawn” was almost entirely unfamiliar to the postwar US experience. We came close in 2002 and the first half of 2003, but eventually, the housing bubble era took over. The dot-com recession was mild, sure enough, somehow, though, recovery seemed so elusive for a longer period than the contraction itself.

There is supposed to be symmetry in these business cycle swings. In fact, there had been in each and every recession between the Great Depression and the dawn of the 21st century. It was so dependable that Milton Friedman in the nineties finally published his “plucking model” version of the economy after having sat on it for twenty years waiting for more business cycle evidence to confirm it.

It would stand to reason, then, given the scale of the economic disaster in 2008 and the first half of 2009, the recovery that came out of it should have been equal in the opposite direction. At no point during the last decade did that ever seem likely.

In the middle of 2014, though, policymakers were beginning to think for a second time there was a chance. Having learned very little from their 2012 experience, officials were primed for success so close they could feel it (emotion, not rational analysis). That earlier year had begun seemingly on a high note, too, even after what had just happened in 2011, a high degree of optimism permeated the landscape which ended instead with two additional QE’s and an economy near to recession.

For QE’s 3 and 4, in 2014 this time would be different. Chairman Yellen wandered up to Capitol Hill in July to testify before the Senate Committee on Banking, Housing, and Urban Affairs. Her theme was the labor market. It was clearly improving; therefore, the likelihood of a false dawn had been greatly diminished in the official models.

Based on this view, the FOMC first under Bernanke had begun to taper the last two QE’s and then under Yellen they were expected to be terminated entirely.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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