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August 13, 2010

The Federal Reserve's KoolAid

Recently, the Federal Reserve released updated economic forecasts for the remainder of 2010, and all of 2011 and 2012.  What struck me was the optimism that the Federal Reserve appears to have for our future economic growth.  For 2010, the Fed estimates GDP to be 3.5%.  Coming off of a 2.7% quarter and a 3.7% first quarter, GDP would need to be 3.8% over the next two quarters in order to reach that goal.  While it is possible, I find this target highly unrealistic.

Looking further out, the Fed expects growth to be around 4% for both 2011 and 2012, with inflation around 1% for both years.  I find this hard to believe.  The last time we had this type of growth over an extended period of time, we had a massive housing and debt bubble fueling it.  In the instance before that, we had an IPO bubble in our equity markets.  I acknowledge that the GDP figures are possible, but the Fed needs to join me in stating that if we do reach these targets, another industry bubble is present in the economy.  Judging by what the Fed is projecting, this bubble would be large as well.

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