According to America’s Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper. The Dow rose 98 points yesterday in anticipation.
Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why does anyone take them seriously?
Prakash Loungani, an economist working for the IMF, undertook a study, not so much to find out as to gawk and laugh. It was published in 2001 in the International Journal of Forecasting.
For those of us who have been following the story, there were no surprises in it. “The record of failure to predict recessions is virtually unblemished”, he reported.
That was in 2001. Surely, by 2014, the experts had managed to stain their pathetic record with some success? Nope. Mr Loungani and his colleague, Hites Ahir, took another look. They examined 77 different national economies, of which 49 were in recession in 2009. How many economic forecasters saw the recessions coming a year ahead?
Go ahead, dear reader, take a guess.
The answer is zero. Recession, or no recession? It’s a binary question. You’d think a few would have gotten the right answer by chance. Instead, none did.
Queen Elizabeth II was baffled. She wanted to know how come, with so many economists on Her Majesty’s payroll, none had warned her of the worst recession to hit the developed world since her grandfather, George V, was on the throne.
She needn’t have bothered asking. It didn’t matter whether the economists were working for private companies or for the government. The predictions they made were terrible. Economists didn’t see the recession of 2009 until it had crashed onto their heads – after the markets had been cut in half and Wall Street has come within a hair of going broke. Then, of course, their eyes were shocked open. Everywhere they looked, they saw recessions – even where there were none. They predicted recessions in 54 of the 77 economies studied by Loungani, six more than actually had them.
Which brings us back to our own Fed. Its “Dynamic Stochastic General Equilibrium” model makes forecasts; they are always wrong. For example, back in 2011, their model predicted growth of around 3.5% for 2014. Each quarter they adjusted the reading downward, as the future approached the present. Now, they are projecting growth for this year of barely 2%.
Quack, quack, quack – why do people pay them any attention? But not only do they listen, they salute, and implement trillions of dollars’ worth of fixes and fiddles, many of which result in disaster. It is as if George Armstrong Custer rode to the Little Big Horn on the advice of a palm reader.
You might object, saying that we are not giving the devil his due. Economists have “avoided another depression”. And they’ve even managed to bring volatility down to levels that haven’t been seen in ten years. This despite adding $10trn to central bank balance sheets, goosing up the stock market 150% since 2009, and swamping the planet with corporate, student, and sovereign debt.
“Volatility ‘extinguished’ by moves from central banks”, was a recent headline in the Financial Times. The VIX is only about 14. At the height of the crisis, in 2008, when Ben Bernanke warned Congress that if it failed to act by Friday, “we may not even have an economy on Monday”, it was about 80. Now investors scarcely bother to read the headlines… and prices barely budge. Surely preventing prices from going up and down – that’s an achievement, right?
Well, you can say we’re “old school”, on this one. We think prices should be allowed to do anything they damn well please. After all, they’re trying to tell us something. Prices, according to the classical economists, were not to be set. They were to be discovered. And where they are found tells you what to do. High prices bespeak scarcity, and the need for more investment. Low prices shout abundance, or even surfeit, warning you to stay away. Gagging prices serves no purpose at all.
Besides, do you remember the last period of Great Moderation? In the mid-2000s, neither the whine of recession nor the growl bear markets could be heard. House prices rose. Stocks went up. The economy appeared to be in a sustained expansion, caused largely by the Fed’s manipulation of mortgage credit. As late as 2007, no respectable economist could be found, by the aforementioned Mr Loungani, who gave out a peep of warning.
And that sound you don’t hear now? That eerie calm in the investment markets? That is the sound of prices that are not allowed to speak their mind.
Prices that do not speak whisper softly to an o’er-stressed economy, and bid it break down or blow up.
Tomorrow, despite all the manipulation, the price of hourly labour is back to where it was in 1968. What does that tell us?