Do you what the last resort of the debtor is? It is his assurance that he has a sure fire winner in the 3.30 this afternoon. So don’t worry, he’s good for it!
That is essentially what Darling said to the country today. Don’t worry about my debts. I have looked into the future and I see silver crossing my palm! I am expecting growth of 1-1.25% this year and – sly smile to the fool he’s trying to con – 3% and 3.5%. next.
What universe is that going to happen in? Is it in the universe where Greece is about to default or be bailed out by the IMF thus driving a stake into the heart of Euro land? Or where Portugal continues to gets its debt downgraded. Is it the universe where UK unemployment will increase as local councils start to cut staff? Is it the universe where US debt sales have started to run into trouble. Those who bought yesterday’s Two Year’s got stuffed today and the sale of Five years was very wobbly looking.
I suspect Mr Darling’s gets his growth forecasts from the same universe as Greece and the IMF and the EU get theirs. Every single one of them for the last 2 years has been wrong. Not a little bit wrong, but Grand Canyon, gaping-whole-in-the-ground wrong. As recently as Oct ’08 the IMF was forecasting Greece in 2011 would have about 3% growth. By April of last year this was ‘revised’ down to about 1.2% and by Oct ’09 it was down to about 0.8%. The EU estimates were hardly better.
Forecasts are a way of telling lies. Ooops, sorry my forecast was a little off!
Forecast sounds so much better than guess. But are they any better. Evidence form the pat says no not really. What is a forecast? It is the output of a model. What is a model? It is a set of coupled equations representing how the various parts of the economy will interact to which are added a set of multiplier numbers which represent plain old assumptions about the strengths of various inputs to the model. So for example there will be a number to represent how much of an effect every pound of stimulus money the government puts in will have.
I picked this number specifically. Because if you make that number (the debt multiplier) positive you get growth out of you r stimulus. That is your model tells you you will get growth. But this isn’t a result its an in-built function of your input assumption. This is the problem with most models and most notoriously economic ones. Most often the output/result/forecast is based not on the wondrous workings of the model but on the raw assumptions fed into it.
You get out what you want.
And what do politicians and the financial class crave like a vampire for blood? Growth!
Growth is a narcotic. Pension funds need it right now. That is why pension funds are starting to do something very, very stupid. They are starting to invest in riskier assets and some are even starting to leverage themselves, borrowing money to invest against their assets. Remember leverage multiplies profits when things go up but also multiplies losses on the way down.
Why are they doing this so soon after a crash and when ‘recovery’ is more hope than fact? Because they are all dying. BA will die as a company because it’s pension black hole will kill it. Most public funds are massively short. Everyone needs to forecast growth to save them having to tell the truth.
OR I could just be a grumpy misanthrope who cannot admit her is wrong. I am hoping very much the latter is the case.
Good article as usual, Golem. "Forecasts are a way of telling lies" should be printed at the top of every newspaper's financial pages.
I haven't read a lot on economics but I remember reading that economic theory works on the assumption that the economy is composed of an infinite number (!) of small businesses. In no economy is this true: there are always a number of giants who dominate any economic sector. The nearest approximation to pure theory comes in agriculture, where lots of small farmers do compete. Ironically this sector is one which requires State intervention since external factors such as the weather can affect it more than any other economic activity.
One thing I'd like more detail on: your remark that " Those who bought yesterday's Two Year's got stuffed today". What exactly happened?