Bad Theories Lead to Bad Results

From John Mauldin’s latest book, Code Red:

Investors should ask themselves: if central bankers couldn’t manage conventional monetary policy well in the good times, what makes us think that they will be able to manage unconventional monetary policies in the bad times?

I would point my readers to two of my detailed pieces on monetary policy:

What Mauldin says is common sense, and is a summary of my own views.  The Fed missed many opportunities to tighten monetary policy enough during the good times.  They tried to be short-term heroes, not willing to take the heat like Martin and Volcker did.

So why should we entrust these losers with “more powerful” tools (that have never been shown to work), when they can’t use the normal monetary policy tools right?  By over-provisioning liquidity from 1986-2004, the Fed created the trap that we are all in now.

I don’t see a good way out of this, and as for investing, I am mostly holding companies that can pass inflation through, with strong balance sheets, should there be deflation.