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.