WHEN economic historians write their account of the last 10 years, it should be called “The decade of being wrong”.
On November 16 the Financial Times published this forecast: “Flash estimates of Japanese gross domestic product [GDP] in the third quarter will start the week. The expectation is that the economy will rebound, growing by an annualized 2.2 percent.”
On November 17 the paper said: “Monday’s surprise data on third-quarter GDP showed just how ambitious government targets were. Far from expanding at an annualized rate of about 2 percent during the period—as almost every private-sector economist assumed it would—real GDP shrank 1.6 percent.”
Granting that every nation’s economy is complex, the public has been persuaded to believe that economists, both in the government and the private sector, actually know what they are doing. But they do not. Every so-called school of economics promotes itself as having a genuine insight into how the economic system works and what should be done to make it work better.
The definition of economics is this: “A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.”
This goes back to what I wrote in Tuesday’s column, “Simple economics”. How does a society allocate human and physical resources to keep everyone healthy and wealthy? Nomadic tribes moved around because they understood intuitively, or from a bad experience, that if they hunted too long in one area, all the game in it would be completely gone.
The Age of Exploration, which started in the 15th century, not only resulted from a desire to “explore”, but also to find new supplies of resources. But there are no continents left to discover. Modern civilizations are dependent on using the resources they already have, and this is where modern economics comes in to help find answers.
But 90 percent of the time, when the actual economic numbers are released, media reports use the words “unexpected” or “surprisingly” to describe how wrong the economists’ forecasts were.
But didn’t “Dr. Doom”, American economist Nouriel Roubini, predict the collapse of the United States housing market and subsequent recession? It depends on your definition of “predict”. He once predicted that the US economy would go into recession in 2004. Then he predicted that that would happen in 2005, in 2006 and, finally, in 2007. The US economy went into recession in 2008.
Roubini claimed that he had warned the public about the subprime mortgage and the financial crisis in an International Monetary Fund speech in 2006. The only documented evidence showed that he warned about the crisis at an IMF seminar on September 13, 2007. Subprime loans started failing in August 2007.
The US Federal Reserve (the Fed) did not see a problem was coming. US stockbrokers were still recommending buying Lehman Brothers shares days before it collapsed.
In the last five years we have been told that gold would go to $3,000, $5,000 or even $10,000 per ounce. It has not. The Chinese economy was supposed to have collapsed due to its “property bubble”. We are still waiting for that. Because of massive money-printing, we’re supposed to have hyperinflation by now. Wrong again.
The Fed’s quantitative-easing program was supposed to bring the US economy back to pre-recession levels. It has not even come close. The trillions of dollars of unsecured derivative contracts should have brought the global banking system down. The last time I looked, PayPal is still sending money to and from the banks.
But this is what is different now: Trillions of dollars of new money pumped into the global economic system should have done something. Either the central banks and governments or the gloom-and-doomers should have been right about greater economic growth
A lot of people sold their Apple Corp. shares at $10, and a lot bought Citibank shares at $400 and saw them drop to $4. But when the best and brightest economists are constantly wrong about what is going to happen next, that means the game has changed.
Maybe decades of government interference have so badly damaged the economic system that there is no longer any functioning reality. Economics today is like a fictional murder-mystery case where no one can guess who committed the crime.
Send me an e-mail at mangun@gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.