Friday, July 25, 2008

Recessions are Hard to Predict?

An interesting article has appeared in The Telegraph in which they discuss the difficulty of predicting recessions.

The interesting part of the article is as follows:
'Meanwhile, growth in consumer spending, which has been the engine for UK growth for most of the past decade, slowed appreciably - though the precise data on this will not be available until next month.'
In writing this, they neatly sum up why economists were unable to predict the current slide into recession and depression. Once again, they are conflating consumer spending with economic growth, without actually considering where the consumer spending originates. In doing so, they are making the fundamental error of mistaking growth in debt with economic growth. This was one of the central themes of 'A Funny View of Wealth' and I still look on in wonder as I watch how mainstream economists continue to make this fundamental error in the face of the looming economic crisis.

At what point will they finally understand that measuring economic growth on the basis of consumer activity is a recipe for economic disaster?

The Telegraph goes on to say the following:
'Such a suspicion is confirmed by the ONS numbers, although there were a few surprises. Most notably, the services sector, which accounts for around three quarters of UK economic growth, expanded slightly faster than in the first quarter.

However, a closer look shows that this was largely thanks to a surge in transport and communication - perhaps in part due to higher petrol prices boosting profits.

The National Institute for Economic and Social Research said in its latest quarterly report that Britain faces three years of anaemic economic growth, though it will avoid a recession.

I happen to believe that it is too optimistic. With UK consumers and companies more indebted than any of their counterparts overseas the scale of the economic slowdown facing us will be significant.

Don't forget that only a few months ago a variety of economists (and the Council of Mortgage Lenders comes to mind here) were confidently predicting that house prices would not fall this year.

They could not have been more completely, utterly wrong. Economists find it hard to forecast recessions.'

The really curious part is that the author of this article 'sort of gets it', but just does not quite manage to grasp the central point. There is the recognition of the debt problem but no connection is made with the illusory growth that was created by the debt.

I get the feeling that mainstream economists are finally on the cusp of discovery, and am now waiting patiently for the reality to sink in. At that point, no doubt, everyone will become wise with hindsight, and discover what readers of this blog have known for a long time:

Consumer spending does not mean economic growth.

1 comment:

  1. Hi Mark

    I'm still a bit baffled, and this section seems to fit quite neatly with my question on fractional reserve banking. If money is created only when someone takes out a loan, then by definition isn't all economic growth really a growth in debt? And as the debt is taken on in order to spend the money, isn't that growth going to be driven, in large part, by consumer spending?

    I was thinking of this when I asked my earlier question. If I understand the UK's 'FRB' system correctly, it appears that someone, at some point, decided that the best way to regulate the growth of the economy is to base it on the man-in-the-street's judgement, as measured by his requests for loans.

    It seems like a strategy designed to lead to disaster: the man-in-the-street borrows money for a variety of reasons, most of which are quite stupid. He may have a poor, insecure job and but he believes it is necessary to have a plasma television in every room. He doesn't worry too much about how he will pay off the loan; something will turn up. It is obvious that biggest borrowers are often the most stupid people. Businessmen are often just as stupid, taking on huge debts to pursue very fashionable - which bamboozles the lenders - but very poor, ideas e.g. the dotcom bubble.

    And the opposite can happen, in that people stop borrowing and spending money based on equally spurious grounds.

    The central bank has a blunt tool in its control of interest rates, but as we are seeing now, conflicting requirements result in it being impossible to set the 'right' level.

    I am aware that all the above is based on 'a little knowledge' and so is probably way off the mark, but is it really possible that the apparent growth of the economy is regulated by the most stupid people in society? If so, there's no wonder it's unstable!


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