Gongol.com Archives: September 2022
There is no form of misplaced confidence quite like that of the person who thinks they can forecast the state of the economy on a global basis. And make no mistake: The United States is just about a quarter of the whole world's economy, so any forecasts of the US economy are estimates of the global one, and vice-versa. (A wall isn't a house all by itself, but a four-sided house wouldn't be a house if one of those walls went missing.) ■ We may give it a holistic, all-encompassing name complete with definite article ("the" economy), but this amorphous thing we talk about doesn't exist in a mechanical space. It's the aggregation of the uncountable trillions and quadrillions of individual choices made by billions of human beings. "The" economy may be subject to specific trends and forces, but it is also deeply tied to human emotions. ■ That emotionality ensures that waves of irrational behavior will prevail from time to time, and it also ensures that fundamentally unpredictable events will have consequences that no rational forecaster can see coming. If anyone had confidently known in February 2019 that a pandemic was coming, they certainly failed to tell the rest of us -- and yet, can anyone name a single more significant influence on the world economy in the last five years than Covid-19? ■ Lots of people are being paid to try to guess what will happen over the next couple of years, and if any of them were fully honest, they would merely say "If present trends continue, this is my best guess at what would happen in the absence of any surprise events. But there will be surprise events that could easily ruin this entire forecast, so don't read very much at all into this." ■ The very best anyone can or should attempt to do is to draw modest conclusions about the likely trends in specific areas based upon fundamental conditions, and to indicate what kinds of events could influence those trends. ■ For example, the rate of inflation, which is unusually high, should not be expected to ease for a while. The Federal Reserve is using interest rates to try to corral it, but the Fed is working against a huge increase in the money supply -- one that has been ongoing since the economic panic of 2008/2009. Lots of money has been pumped into the economy in effort to keep it from crashing. But much of that money has moved extremely slowly by historical standards, and only a slight uptick in its velocity (like the one encountered recently) can easily be enough to keep prices on the rise. ■ There are other titanic factors at play, too. Take the mass exodus of Baby Boomers from the workforce, who are being succeeded by a much smaller generation of managers and experienced workers. ■ Or take the expense of rearranging supply chains to build resilience against further lockdowns in China or trouble in freight transportation. Or consider the consequences of having to re-make a substantial portion of Europe's energy balance because of the recklessness of the Kremlin and its assault on Ukraine. Or the influence of huge sums of "relief" spending that haven't even been allocated yet. ■ All of those are fundamental reasons pushing in the direction of further inflation for some time to come. Maybe lower than it has been over the last couple of quarters -- but maybe not. The only certainty anyone should have is that it's foolish to make forecasts with any certainty, even in stable times. And these times are hardly stable.