Nobody Knows Nothing

Everyday, my mailbox gets inundated with reports from strategists and economists. Two years ago, most were predicting a fairly rosy scenario for the global economy - and to be fair, so was I. Today, most are predicting a dire future of negative growth and economies mired in a deep and intractable recession. The predictions of the past were mostly wrong; there is little reason to believe that today's forecasts will be much better.

Of course, there were those who were warning of problems, those Cassandras that went unheeded. But many of them warned of problems unrelated to the near-collapse of the global credit system, and the fact that their predictions that something would go wrong were right doesn't actually make them prescient. It's the old "even a broken clock is right twice a day" paradox. You can seem to be right, but it's how you got there that matters. Many people correctly called a housing bubble, but almost no one identified derivatives and structured products as a pending issue that would unravel quite the way it has. The breakdown of the credit system, not the housing market, explains the particular pickle of the present.

When people look to the future, they tend to take the present and extrapolate. Industrial production is plummeting, so people forecast that it will be terrible in 2009. Unemployment is rising steeply and quickly, so predictions are that it will get much worse before it gets better. Past patterns are used as the basis of those predictions, but few question whether those patterns are indeed useful.

We should, because they aren't. Nothing quite like the present crisis has happened before. There has never been a simultaneous, global halt of economic activity. Before the information technology revolution, there couldn't have been. There weren't global synchronized supply chains and credit systems and capital flows that could halt in sync. Now there are, hence the simultaneous, nearly instantaneous cessation of activity after the failure of Lehman Brothers in September.

This also means, however, that the engine could start again in unexpected ways with unanticipated speed. I'm not saying that it will, only that the possibility shouldn't be as discounted as it currently is. Again, no one knows outcomes here, and past patterns are a misleading guide to the future. All that seems certain is that people rarely get future scenarios right, and there is no reason to believe that current projections of a dire future will be any more accurate than past projections of a rosy one.

Orginally posted at: blog.rivertwice.com

Comments

[Petrovas]

Zach is the ultimate perma bull. Do not listen to this guy. He simply puts himself out there so he can market his books. research and firm. He is a salesman, not a real investor.

Beware of Zach

[sposton]

Predictors are making a fundamental mistake of thinking that normalcy is something resembling what existed before the meltdown. Is the US going to resume its buying habits of consumer goods? Where is the money going to come from? Is the dollar going to retain its reserve currency status? Will dollar even exist when all this is done? Any of these can profoundly change the final outcome to something completely different that preceded the meltdown.

[research]

Give the banks all the money,

which they are hording,

but lend nothing to GM,

GM needs the Loan because the banks aren't lending.

See a little problem there???

WE HAVE been here before.

FDR gave us a path out of depression that works.

Hoover gave money to the bankers and made it worse.

Really.

Do some research on Hoover versus FDR

http://www.huffingtonpost.com/users/profile/research?action=profile

[DuganS1]

Why would banks lend to GM knowing they are a huge credit risk ($60+ billion in debt and a $2 billion or so market cap)??? Hoover gave money to the bankers? The problem from 1929 to 1932 was that the Federal reserve didn't help the banks. FDR did not get us out of recession. In 1938 the economy was still tremendously worse than it was in 1929. Late 1920s unemployment was 4%, in 1938 it was over 19% - not a good result for FDR.

[research]

You didn't read the time line did you?

FDR got the recovery on the mend till he cut spending in 37 to try and balance the budget.

You body agrees with you.

You GOP have zero credibility.

[Petrovas]

Get your facts right. FDR failed many times but hired the media and pr people to smooth over his years of failed problems.

We got out of the Great Depression through WWII. not the New Deal.

Let us hope Obama does not pull the wool over everyone's eyes and shock and awes himself into taking too much power and we ultimately get out of the mess we are in through a war.

RIght now he is scaring people that they will lose their jobs if they do not give him a trillion dollars.

I got news for you people. The stimulus will take months to actually take effect and the projects are mostly corrupt pork. The eternal road paving. We do not have that many bridge builders.

Bailout = Stimulus = Lifeline

The more the government gets involved, the longer this fiasco will be stretched out

[joebaggadonuts]

This article is a very mild version of what NN Taleb is saying, and I highly recommend seeking out Taleb's work. However, the article also goes further to say that no one can make guesses that are worth pursuing. This is folly. Wisdom comes from hard experience in applying analogous circumstances to the levers of power that one has to moderate or affect where one is in the future. That's why we fly with pilots with many hours of flying under their belts and go to surgeons with many successful surgeries in their records - to find a successful outcome.

I am not saying that there is a science to this, this is art. Economics, to the extent it pretends to be Science, is also folly.

[Henry]

Economics is a lot like the weather. Maybe today and the nxt day, but too many variables know for certain. We have just come through a Katrina of a lashing and found that the financial levees are inadequate for global warming or is tht negative real interest rates.
And it will turn out that New Orleans will be reconstructed below sea level again...and the progeny of Katrina will return with a steeper havoc. And so it is the the financial world. Value is a lot like morals. Everyone talks a good game.