Praying for Time in the Business Cycle

The business cycle is being incredibly extended with the Fed rate at the ZLB. Effective demand is increased.

But in the end, the effects of a low Fed rate cannot keep the business cycle from closing in on the effective demand limit and ending. It can slow down the process, but it cannot reverse the process.

I made his graph to show the effective demand limit with and without monetary policy.

limit model 24

Without monetary policy, the business cycle would be struggling as the green dashed line cuts lower into the utilization of labor and capital (TFUR).

Recent developments in monetary policy from the dropping of the 10 year Treasury maturity rate created a resurgence that allowed the TFUR to rise without effective demand biting into it. But in time, the effective demand limit will bite… and the cost of low Fed rates not disciplining the markets will be paid.

In essence, monetary policy is Praying for Time…