We’ve been here before. Economists and central bankers become giddy about the prospects for success, meaning actual recovery. For that to happen, reflation must first attain enough momentum. If it does, as is always forecast, reflation becomes recovery. The world then moves off this darkening path toward the unknown crazy.

The problem has been that officials mistake reflation for what it is. Each time they believe it is the only requirement. If the economy reaches reflation, policymakers seem to think, then it is only a matter of time before complete recovery. It’s this false impression that leaves us with “unexpected” downturns, as well as no serious investigation into the lack of recovery.

Reflation, relatively speaking, is easy. The eurodollar world at the end of its downswing cycle stops being such a negative force. For whatever reasons, liquidations, optimism, whatever, global banks cease withdrawing capacity. A few then offer a little expansion followed by others so long as no reversal (downside risk) appears imminent. The natural inclination is in the direction of reflation.

But that’s just not enough. Eventually, those who take risks need them to pay off; or, more accurately, they need the plausible path for the payoff to remain, well, plausible.

If instead, things start to look like they’re tilting back toward the downside, dealers become nervous and then nervousness is transformed into a full-blown monetary pull-back. At some point, it can develop into self-reinforcing processes; the monetary system “tightens”, the economy slows, increasing perceptions of downside risks; leading to more tightness and economic slowing; and so on.

One key marker along the way in that progression is, ironically, central bankers’ projections. Not for the reasons they expect or might hope, of course. Rather, these perpetual optimists are forced time and again of their straight-line extrapolations toward nothing but full recovery. When these hardened idealists begin to waver, it confirms trouble ahead.