« Assorted links | Main | Fearless Critic »
The forecasters and the forecasts
Hugo Lindren has just written a very interesting portrait of some of the major forecasters and their economic forecasts. In New York I was asked a number of times about my own forecast. I offer it with trepidation but here goes:
1. The next year will see significant recovery in terms of published economic magnitudes.
2. "Dormant inflation" will spring to life, at some point quite rapidly, and the Fed will choose to tighten. Five to six percent inflation for a while would be OK but we will be faced with the prospect of more than that and the Fed will choke it off and prevent it.
3. We will see a "double dip" recession, with the second dip more closely resembling the 1979-1982 experience than did the first dip. It's not just that the Fed may make an error in the timing of tightening; there may truly be no good path from here to there.
4. There will be yet a third dip to the recession, resulting from our current fiscal choices. At some point borrowing costs will rise and taxes will go up. There's a chance of a financial crisis for our government, especially if Chinese growth does not hold up.
5. Ten years from now, the United States will have settled into a lower long-term average growth rate, in part for policy-driven reasons and in part for demographic reasons.
6. There is still some chance that our current situation leads directly into a much bigger downturn. This will depend on international factors, not on the internal dynamic within the U.S.
I do not put any of this forward with great confidence.
Addendum: Arnold Kling comments.
Posted by Tyler Cowen on June 7, 2009 at 07:36 AM in Economics | Permalink
Comments
The spread between nominal treasuries and TIPS suggests much lower inflation - in the 2% to 2.5% range for the foreseeable future. Any concerns about credit quality should affect nominals and TIPS equally. There may be a liquidity premium raising nominal treasury prices, but not enough to get you to 5%-6% inflation. You may of course believe the market is being irrational.
Borrowing costs - I've seen data that total borrowing in the US has stayed relatively constant, with higher government borrowing compensating for lower private borrowing.
Posted by: fusion at Jun 7, 2009 8:20:33 AM
I was in a hopeful mood this morning until I read this forecast.
Posted by: thehova at Jun 7, 2009 8:20:33 AM
It'll be interesting to see how accurate you are compared to your previous forecast here:
http://www.marginalrevolution.com/marginalrevolution/2005/01/if_i_believed_i.html
Posted by: MTB at Jun 7, 2009 8:37:01 AM
Generally ABCT predictions such as the ones you made earlier, Tyler, tend to be pretty good overall. I am hoping you are incorrect about all this, and I am seeing, politically some hope. The people interested in low barriers to entry and low government involvement in industry are getting semi organized (FINALLY!)
Posted by: Doc Merlin at Jun 7, 2009 9:13:13 AM
"You may of course believe the market is being irrational."
The market has been choosing its rationalities for the last year or so.
Posted by: odograph at Jun 7, 2009 9:27:36 AM
Fusion, I am not saying we will get the high inflation, I am saying we will choose to stifle it. So I'm not claiming the market is irrational.
Posted by: Tyler Cowen at Jun 7, 2009 9:36:47 AM
While I am inclined to agree with your forecast, there are some point on which I disagree:
I believe we will see a triple dip but I think each successive dip will be more shallow than the previous. I also believe that, beginning in early fall, we will begin to see significant signs of recovery probably in the housing market with decreasing unemployment numbers by the end of the year. All this, of course, is based on all things remaining equal with not major shocks to the system.
Posted by: Lionel Laratte at Jun 7, 2009 9:47:46 AM
Tyler, are you suggesting the Fed will raise rates to prevent 5-6% inflation, which will slow the economy and vindicate that the nominal-TIPS inflation prediction of 2-2.5%?
Posted by: fusion at Jun 7, 2009 10:15:09 AM
Why can't the same global savings glut that catalyzed this be mucking with the bond market? Foreigners aren't irrational when they don't believe they have better alternatives. Rational doesn't mean correct. I think we will have inflation for the simple reason that they will need it. There won't be enough inflation opponents to oppose it, although Bernanke did sound some protest last week.
The short-term is difficult to predict. However, what is easy to see is that we aren't working on the right fundamentals. Why, oh why, are we not "Selling America" by promoting immigration and getting educated foreigners to buy these houses and buildings? But again, neither is anyone else being that smart, the Chinese still have nothing smarter to do with their dollars than send them here for our government to spend, so others may not be getting ahead.
Posted by: Andrew at Jun 7, 2009 10:19:11 AM
Any concerns about credit quality should affect nominals and TIPS equally
I don't think it's safe to assume this. I can imagine that with 30% inflation (let alone 30,000%), a government might proclaim that it's "unfair" for holders of inflation-adjusted bonds to get all the value of their investment when so many others are suffering. They might implement this via a special tax rather than a formal default. The many "unprecedented" actions by governments (especially the US government) during the present crisis have made this more likely, especially since they seem to revel in how unprecedented their actions are, rather than trying to keep the damage as small as possible.
Posted by: Radford Neal at Jun 7, 2009 10:23:17 AM
Fusion: You can't calculate long-term inflation expectations off of TIPS without breaking the rates out to spot rates. TIPS traders are expecting a very low rate of inflation over the next two years and then inflation in excess of the 2-2.5% number that you quote by taking the difference of the yield to maturities.
Same thing holds for the steep yield curve. If you calculate that spot rates (treasury bonds with 0% coupons) and look at the implied 8-year/2-year Forward Rate Agreeement rate it is scary.
Posted by: Jay at Jun 7, 2009 10:46:41 AM
"the United States will have settled into a lower long-term average growth rate, .... in part for demographic reasons."
Tyler,
I'm shocked!
Posted by: josh at Jun 7, 2009 10:51:29 AM
Shouldn't the new higher savings lead to haigher growth if the financial system can channel savings to investors? As for demography, is Tyler assuning that people retire as in the past?
Posted by: ThomasH at Jun 7, 2009 11:00:04 AM
Jay, look at http://www.bloomberg.com/markets/rates/ 2-2.5% holds out to 30 years. Or use the WSJ's tables of every outstanding treasury http://online.wsj.com/mdc/public/page/2_3020-treasury.html?mod=topnav_2_3010 and http://online.wsj.com/mdc/public/page/2_3020-tips.html?mod=topnav_2_3010 for more details
Posted by: fusion at Jun 7, 2009 11:01:38 AM
If #4 were true, then Japan would be facing gigantic borrowing costs. They are not.
Their deficit is at 150% of GDP:
http://www.reuters.com/article/bondsNews/idUST8256220090108
but their long term borrowing costs are 2.25% or so:
http://www.bloomberg.com/markets/rates/japan.html
Clearly, there are other factors that are much more important to long term rates than fiscal policy.
Posted by: mickslam at Jun 7, 2009 12:12:27 PM
Oh, so I read your blog because of your opinions of which of which I now find you have little confidence? Okay, then my opinion is that your opinions are very provincial even though you see yourself as a renaissance man. And, your opinoins? Well I have little confidence in them, perhaps as much as you but probaly not. Maybe you should predict the climate?
Posted by: twwren at Jun 7, 2009 2:45:30 PM
The inflationary scenario (ignoring the deflationary scenarios) I apply the highest probability to is one where commodity prices advance strongly on fundamental demand. That is, in the absence of inflation, prices will still increase to a high enough level that the CPI would initially register the increase before business and consumers realized it was not temporary and slashed other spending. I see the government responding in exactly the wrong way.
Posted by: 8 at Jun 7, 2009 4:41:46 PM
"Ten years from now, the United States will have settled into a lower long-term average growth rate, in part for policy-driven reasons and in part for demographic reasons."
To this I would say that I see one of two outcomes as more/most likely:
1. The U.S. does not settle into lower long-term average growth unless major economies like China and India and mid-tier modern-day "tigers" do as well. I do not see any amount of "decoupling" taking place that leaves the U.S. as the outlier, though it's apparent that the conventional wisdom today is that the U.S. will be the world laggard regardless of how convoluted the path to that position may be.
2. I believe in ten years the romanticization of non-American economies and markets will have been largely put to rest, with reality helping to dampen any potential demographic negatives with regard to immigration levels.
If Tyler's scenario in ten years is accurate and is not accompanied by a broader economic malaise where all major economies are settling into lower long-term growth rates, then America is well and truly f*cked as a global player of any sort, and not just for a decade or two.
Posted by: PM at Jun 7, 2009 7:19:05 PM
in the country of the old, the one year old man is king.
Posted by: babar at Jun 7, 2009 10:37:31 PM
It is universally acknowledged that Tiffany Jewellery are indispensable to us.On no account can we ignore the value of Tiffany and Silver Jewellery.
Posted by: Tiffany & co at Jun 8, 2009 1:40:25 AM
"Ten years from now, the United States will have settled into a lower long-term average growth rate, in part for policy-driven reasons and in part for demographic reasons."
Perhaps you'll someday amplify on those "demographic reasons"?
Posted by: Steve Sailer at Jun 8, 2009 2:25:00 AM
@Steve:
I think Tyler was refering to the retirement of the babyboomers.
Posted by: JSK at Jun 8, 2009 11:38:57 AM
There will be yet a third dip to the recession, resulting from our current fiscal choices. At some point borrowing costs will rise and taxes will go up.
When has increased taxes had a negative impact on the economy, except when the tax increases were intended to dampen economic activity. The early 90s tax hikes were followed by the longest expansion in US history and the highest rate of employment. The half dozen tax hikes Reagan signed were followed by or coincident with the second longest expansion and the second highest level of employment in US history. The tax hikes signed by Hoover in 1932 was followed by the steepest increase in employment in history, with a tax hike in 1934 as well, as I recall.
The problem in 1937 was the tax hike and government spending cut. The government spending was dominated by investment in "infrastructure" and most investment requires lots of labor with the return on that labor cost coming years and decades later. For example, the high labor cost of the Hoover Dam is still generating real return on that labor seven decades later.
I think the problem with the investment in the 90s vs the investments in the 40s, 50s, and 60s in particular, (and continuing as government programs do at the same dollar levels for decades to come) is that the infrastructure built is unproductive relative to prior investments. For example, a 3000 square foot house is less productive as an investment than a 2000 sq-ft house, which is less productive than the 1500 sq-ft house before that. On the other hand, the power generated by the Hoover Dam is worth more today than it was in 1950, as are the investments in right aways in the 50s and 60s for roads and the investments in the railroad right aways in the 19th century.
Posted by: mulp at Jun 8, 2009 12:25:33 PM
"@Steve:
I think Tyler was refering to the retirement of the babyboomers."
Oh, indeed, that's obviously the only demographic change happening in America. What's happening in California can only possibly be driven by that kind of demographic change and not by any other kind, which, by the way, does not exist. Nothing to look at, just move along here.
Posted by: Steve Sailer at Jun 8, 2009 4:40:10 PM
@Steve:
Ehm... maybe you should ask him??
Posted by: JSK at Jun 8, 2009 5:03:38 PM
