If you have not yet read Part 1: Bad Models Result In Terrible Outcomes available free to all readers, please click here to read it first.

So let’s see if we can understand the model errors for the central banks.  Again this is important because if they’ve got it wrong, then we all will pay a very heavy price — with Venezuela, Argentina, and Zimbabwe all providing vivid examples of what happens when the social contract of money is ruined.  

To begin, the current crop of monetary practitioners at the world’s central banks are all devotees and advocates of the neoclassical branch of economics.  It’s an odd dogma for them to hold because its track record at explaining or predicting what has either happened or might yet happen is utterly dismal.

As Steve Keen explains:

[Economics as understood by the central bankers] has always been grounded in the beliefs that (a) capitalism is inherently stable, (b) that the financial sector can be ignored—yes that’s right, ignored—when doing macroeconomics, and (c) that the Great Depression was an anomaly that can also be ignored, because it can only have been caused either by an exogenous shock or bad government policy, both of which cannot be predicted in advance.

(Source)

The main flaw in the neoclassical approach to economics is that it completely ignores, or rather assumes away, any and all trends in debt creation.  In this bizarrely incomplete system of thinking, the financial system is considered to be, essentially, a self-correcting zero-sum entity (that balances itself out nicely with a little help now and then). 

So such things as carefully tracking GDP increase per new unit of debt, overall indebtedness ratios and understanding that crises are bred from complacency are of no practical concern to a neoclassical economist, such as those fully occupying the halls of power currently.

One way to understand the dogma that infects the central banking halls of power lies in what Jim Kunstler recently surfaced in a piece he wrote on the Overton Window, which, importantly…