Connolly said the next step will be highly political. Fed officials are alarmed by the prospect of a second Trump presidency – this time unbridled – fearing that he will change the Federal Reserve Act and open the floodgates to inflationary fiscal dominance.

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President Joe Biden has already packed the Fed with allies, much as Trump packed the Supreme Court. We can assume they will strive to engineer his re-election, disguising this with creative economic science. “The temptation to say that inflation has already come down a long way will be very strong,” he said.

This points to an initial rate cut in June, followed by cascading cuts in rapid succession – though still too little, too late. The Fed board is already preparing for a hand-brake U-turn. Board governor Adriana Kugler recently reminded everybody that the Fed has a “dual mandate”: jobs, as well as inflation.

Days earlier, New York Fed chief John Williams said the supply side shock of the pandemic had blown over and that US inflation had carved out a near-perfect round trip, “like the Apollo missions to the moon and back.” He said three-year inflation expectations are now below their 2014-2019 average. This is a Fed preparing its alibi.

The US economy has lost a net 900,000 workers since November based on the US household survey. This has lifted unemployment from 3.4 per cent to 3.9 per cent. The jump is close to triggering the Fed’s “Sahm Rule” recession indicator.

The US economy is not as strong as widely assumed. The latest US financial accounts show that gross domestic income (GDI) grew by just 1.2 per cent last year. This measure has been consistently weaker over recent quarters than the GDP figure, which should give pause for thought.

‘The real difficulty with the Greenspan maxim – that a problem deferred is a problem solved – is that you have to keep on deferring, via ever-bigger bubbles that ultimately threaten to destroy both capitalism and democracy.’

Bernard Connolly

A Fed study found that GDI is more accurate when the economy rolls over. It foretold a recession in 2007 when the GDP figures (revised down later) were still signalling a clear blue sky.

Such modest growth is thin gruel for an economy running a wartime $US2 trillion ($3 trillion) fiscal deficit at the top of the cycle. So what will happen this year as the caffeine fades and the fiscal impulse turns negative?

The Wicksellian theme running through Connolly’s book is that central banks have created a chronic “intertemporal” misalignment in Western economies, starting with Alan Greenspan in the 1990s.

They have let asset booms run unchecked but have always stepped in to prevent the economy from coming back into balance during downturns. But you cannot pull consumption from the future forever without consequences. The future catches up with you.

“The real difficulty with the Greenspan maxim – that a problem deferred is a problem solved – is that you have to keep on deferring, via ever-bigger bubbles that ultimately threaten to destroy both capitalism and democracy,” he said. Furthermore, this reflex obstructs the Schumpeterian cleansing process of creative destruction.

As Joe Biden’s budget boom deflates this year, it will become clear that the US economy cannot handle interest rates anywhere near the current level of 5.33 per cent. America and the West will discover they are on the same conveyor belt towards “ever-lower real interest rates”, requiring drastic cuts to refloat the next bubble in equities and credit.

My angle is slightly different. Deflation will keep coming back to haunt us with each cycle – requiring zero rates and crazy money – because of ageing demographics, digital technology, and, above all, the Asian saving glut.

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The cardinal fact is that China produces 31 per cent of global manufactured goods but accounts for 13 per cent of total consumption. Xi Jinping’s regime is dumping massive excess capacity on the rest of us. It is reverting to the worst practices of Leninist capitalism. This is the elephant in the global rowing boat.

Whether Connolly is right or savings glut theorists are right, both imply a secular collapse in the natural rate of interest and the subversion of the Western free market system.

The central banks and the academic priesthood are floundering because their canonical DSGE model – new neoclassical synthesis – assumes that the economy comes back into equilibrium when it patently does no such thing.