182 THE BiG DROP
Federal Reserve. They’re not dopes. A lot of people like to ridi-
cule them and say they’re idiots. They’re not idiots, though.
They’ve got the 160 IQs and the PhDs.
Every year, however, the Fed makes a one-year forward
forecast. In 2009 they made a forecast for 2010. In 2010 they
made a forecast for 2011 and so on. The Fed has been wrong
five years in a row by orders of magnitude.
They’ll say they project 3.5 percent growth and it actu-
ally comes in at 2 percent. Then they lower the forecast at 3
percent and it actually comes in at 1.9 percent.
It’s the same thing with the IMF. The IMF forecasts have been
wrong five years in a row too. When I hear these forecasts and I
hear commentators say, “We’re projecting 3 percent growth next
year based on the IMF forecast,” I just laugh. How many years in
a row can you be wrong and still have any credibility?
But they’re not dopes — they are really smart people. I
don’t believe they’re evil geniuses trying to destroy the world.
I think they’re dealing in good faith. If they’re so smart and
they’re dealing in good faith, though, how can they be so
wrong for so long?
The answer is they’ve got the wrong model. If you’ve got the
wrong model you’re going to get the wrong result every single
time. The Federal Reserve, policymakers, finance ministers and
professors around the world use equilibrium models.
They treat the world like car engine that works fairly well
until it gets a little bit out of sync. At that point you just need to
tweak it and then it runs fine again. As I’ve said, unfortunately,
the world is not an equilibrium system.
Now, we pay attention to those models because the Fed
pays attention to them. If you’re trying to figure out what the
Fed is going to do, you need to know how they think. And
they’re using these equilibrium models.
I don’t believe the models are accurate, but I do believe
the Fed thinks they’re accurate. So the second derivative of