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Saturday, December 1, 2007

Learning math from history?

Extremely perplexing is the econometrician or forecaster's predilection to map economic events on a spreadsheet of indicators and then presume the next economic event will follow as an outcome of the same pattern. It seems to ignore the free flow of information turning inflation into interest rates into investment decisions into demand. That is, none of these separate indicators, from employment to stock prices is independent of the others. In fact, if you look closely, you see many of them morph into each other or are subsumed by each other.

Very discouraging along these lines was listening to the IMF's chief economist, I kid you not, Simon Johnson on the BBC's Business Daily program yesterday in which he drew a parallel to 2001, for the current downturn, when he claims a blip in the stock market caused unexpected corrections in asset prices around the world.

The lessons of the past seven years are far closer and far more clear than this.

The subprime meltdown and financial market freeze up are not events that happened out of the blue. Oil prices and dollar correction are directly related. Does anybody really claim the dollar correction happened out of the blue? It's been going down ever since the cheap money program of Alan Greenspan began in 2000.

Instead of admitting the strength of the Bush-Greenspan debt bubble was an illusion born out of bad management, analysts pretend it is something nobody saw coming and it is an event of the past six months.

Subprime loans were let because there was nobody else to take the money or promise the returns. The economy was floated on this bogus paper and still performed poorly, with stagnant wages and only modest GDP growth.

The housing bubble flowed directly from the dot.com bust, as disappointed investors moved from stocks to real estate. Now very disappointed investors have moved into commodities and currencies and threaten to repeat their pattern there. Oh, and back into stocks and bonds. Because, without a productive forward-looking economy, there are just so many places to put your paper money.

The question should not be Why us? Or even How could they do this to us? It should be What kind of economy do we have now? What prospects do we have now, if the strength we've seen was not strength, but weakness?

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