Beware of The ‘Permanently High Plateau’ Fallacy
The comments below are an edited and abridged synopsis of an article by Jesse Columbo
There’s a belief that central banks have virtually eliminated recessions through their aggressive monetary stimulus programs. Unfortunately, that belief is indicative of investor complacency and overconfidence.
As the bubble stages show, investors also believe that the market is experiencing a new paradigm in which the old rules no longer apply. During the late 1990s dot-com bubble, many believed that the US had a New Economy in which technological innovations would keep inflation low, and that recessions had been eliminated. Of course, the New Economy believers experienced a rude awakening when the dot-com bubble burst, the Nasdaq sank 80%, and the US economy experienced recessions in both 2001 and 2007.
Columbo discusses the false belief that the Fed and other central banks have created economic growth and so-called economic recovery; the dangerous economic growth-driving bubbles that have been forming as a result of the Fed’s loose monetary policy; and the high percentage of today’s startups that are malinvestments.
The beliefs that ‘this time is different’ and ‘we are in a new paradigm’ are a hallmark of economic bubbles. Though the Fed and other central banks have created an unusually long economic cycle by keeping their monetary policies so loose for so long, there is no escaping the eventual correction of the tremendous excesses of malinvestments that have built up in the past decade. To believe that the Fed has finally tamed the business cycle and can create sustainable economic growth without busts is naive and will be disproven in the not-too-distant future.