Queen Elizabeth once commented to a journalist that once in a while "one of these", recessions, occurred and yet no Prime Minister or government official had determined how to deal with it. I wondering if she was actually asking here, "why didn't you experts see this coming, because after 60 years of watching I saw that the prosperity had to be balanced."
1
Predictions in economics are like predictions of weather one month going forward. There is some science to economics but most most is based on human behavior.
1
How can anyone read a market signal into interest rates when these rates are set by government and central bank policy? The author must know better. It is like saying that a city that has low apartment rents because of rent control must have a surplus of housing.
Indeed the price distortions induced by years of artificially low interest rates are part of the problem with the global economy. Businesses are loading up on cheap debt not to invest in PPE or R+D, but to pay dividends and buy back shares to pump up their stock prices. Governments are loading up on cheap debt not to pay for large scale national projects that will pay dividends for future generation but simply pay operating expenses and hide cost from the electorate by avoiding the tax increases necessary to pay for them. Individuals are staying out of savings and money market accounts and buying stocks.
Artificially low interest rates are what got Greece into so much trouble. After joining the Eurozone, they were able to borrow huge amounts of money at very low rates (due to implied guarantee by ECB and richer Eurozone countries) which they then blew on waste and corruption. Look how well that has ended.
Indeed the price distortions induced by years of artificially low interest rates are part of the problem with the global economy. Businesses are loading up on cheap debt not to invest in PPE or R+D, but to pay dividends and buy back shares to pump up their stock prices. Governments are loading up on cheap debt not to pay for large scale national projects that will pay dividends for future generation but simply pay operating expenses and hide cost from the electorate by avoiding the tax increases necessary to pay for them. Individuals are staying out of savings and money market accounts and buying stocks.
Artificially low interest rates are what got Greece into so much trouble. After joining the Eurozone, they were able to borrow huge amounts of money at very low rates (due to implied guarantee by ECB and richer Eurozone countries) which they then blew on waste and corruption. Look how well that has ended.
5
Interest rates are set by the market not the government or Central Bank policies.
Interest rates would necessarily rise if the market did not believe in the value of US Treasury Bonds.
The Fed (US Central Bank) could buy bonds putting a downward force on rates, for a little while, but if the rest of the market did not continue to buy bonds then the Fed could not buy enough to keep the rates from rising.
The main reason US Treasury interest rates are low is that there is a lot of money to invest throughout the world and there are few investment vehicles considered safe for investment.
Ironically, when S&P issued a warning on US Treasury debt a few years ago, the market's reaction was to become scared, and buy US Treasury Bonds, pushing rates down.
Interest rates would necessarily rise if the market did not believe in the value of US Treasury Bonds.
The Fed (US Central Bank) could buy bonds putting a downward force on rates, for a little while, but if the rest of the market did not continue to buy bonds then the Fed could not buy enough to keep the rates from rising.
The main reason US Treasury interest rates are low is that there is a lot of money to invest throughout the world and there are few investment vehicles considered safe for investment.
Ironically, when S&P issued a warning on US Treasury debt a few years ago, the market's reaction was to become scared, and buy US Treasury Bonds, pushing rates down.
4
The fed can buy as many bonds as it wasn't to. How? They create as much money as they want by changes in a spreadsheet. They set the interest rate not the market.
That is incorrect. Interest rates are one of the macro tools the government has to control inflation. They set the discount window rate, which is important for the banks and the general rate. The banks have all the money but they don't set interest rates.
When you start with a bunch of clueless clowns, what do you expect?
If you think the forecasts of economists are bad, you should look at the forecasts of non-economists. For the the past 5 years numerous financial analysts and other Wall Street know-it-alls have predicted a huge increase in inflation because of loose monetary policy. Some are still predicting it.
8
Predicting future interest rates? Governors of the Federal reserve, and others, have been talking about "normalizing" interest rates. What does that mean? Americans deserve an explanation, because as a sovereign currency-issuing nation, we can reward risk-free investment in Treasury "debt" at whatever level we choose. There is no mathematically obvious correct level, and the market does not set the level, the Fed OMC effectively does.
Now is the time to drop the superstitions that cause us to act as if we are on the gold standard. It is plausible that a risk-free rate "should" be zero- A new normal. Why encourage money to sit unproductively in the savings accounts we call treasury bonds? We no longer peg our currency to some metal (and its fluctuating value), so our government can produce as little or as much as meets the needs of the economy. The monopoly producer of the currency does not need to borrow it.
Or maybe there is some good reason why we should continue the ruse of borrowing something we can produce at will. What is that good reason? Is it how we fund retirement (with risk-free interest)? Is it how we pay off the wealthy and provide them safe income? Is selling Treasury debt a way for our government to surreptitiously accomplish some task that we are afraid to admit to openly? Why are we afraid?
We need to drop the superstition that our federal government is just another user of currency like people and businesses.
Now is the time to drop the superstitions that cause us to act as if we are on the gold standard. It is plausible that a risk-free rate "should" be zero- A new normal. Why encourage money to sit unproductively in the savings accounts we call treasury bonds? We no longer peg our currency to some metal (and its fluctuating value), so our government can produce as little or as much as meets the needs of the economy. The monopoly producer of the currency does not need to borrow it.
Or maybe there is some good reason why we should continue the ruse of borrowing something we can produce at will. What is that good reason? Is it how we fund retirement (with risk-free interest)? Is it how we pay off the wealthy and provide them safe income? Is selling Treasury debt a way for our government to surreptitiously accomplish some task that we are afraid to admit to openly? Why are we afraid?
We need to drop the superstition that our federal government is just another user of currency like people and businesses.
2
Bonds are instruments of monetary poilcy, they are not necessary to finance the government per se. As the sole issuer of US dollars, the US government is the only entity which can issue risk free dollar denominated debt. The interest rate it chooses to remunerate investors with who buy these bonds is an economic policy variable. It is absolutely insane that government economists would try to predict this rate. It is set by the government!
Interest paid on the national debt is essentially a bribe not to purchase risky assets. Frothy asset markets argue in favor of increasing this bribe. A depressed economy argues for reducing it drastically. This was the main goal of QE.
Why doest the government insist on pretending that it is user and not an issuer of the currency? Its because many Fed economists are terrified that if politicians ever learned the truth that they face no binding fiscal constraint, we'd get runaway government speding leading to hyper-inflation. In other words, we would abuse our own currency monopoly and throw price stability out the window. Given the make up of Congress, I can understand their fear.
Eg, Jared Berstein, a brilliant guy really, is still talking about the 'loanable funds' nonsense in this article. However, the whole "you can't handle the truth" attitude is no way to run a democracy. It is also leading to bad policy. We got fiscal restraint at exactly the wrong time (2011) beacuse of austerity politics based on faulty premises.
Interest paid on the national debt is essentially a bribe not to purchase risky assets. Frothy asset markets argue in favor of increasing this bribe. A depressed economy argues for reducing it drastically. This was the main goal of QE.
Why doest the government insist on pretending that it is user and not an issuer of the currency? Its because many Fed economists are terrified that if politicians ever learned the truth that they face no binding fiscal constraint, we'd get runaway government speding leading to hyper-inflation. In other words, we would abuse our own currency monopoly and throw price stability out the window. Given the make up of Congress, I can understand their fear.
Eg, Jared Berstein, a brilliant guy really, is still talking about the 'loanable funds' nonsense in this article. However, the whole "you can't handle the truth" attitude is no way to run a democracy. It is also leading to bad policy. We got fiscal restraint at exactly the wrong time (2011) beacuse of austerity politics based on faulty premises.
4
MIke;
Much of what you say is just totally wrong.
Treasury bonds are necessary to fund the US Government until the budget is balanced or in surplus.
US Dollars, like the $20 bill you have in your wallet, are Federal Reserve Notes by definition they are credits on the books of the Federal Reserve. The Federal Reserve issues US dollars.
'Yankee Bonds', denominated in US dollars, can be issued by foreign entities, and, depending on the issuing entity and nature of the debt instrument, can be a relatively risk free as US Treasury Debt.
The interest rate of a bond is generally set by the issuer, but the yield is determined by the market price of the issue, which is set by the market.
Much of what you say is just totally wrong.
Treasury bonds are necessary to fund the US Government until the budget is balanced or in surplus.
US Dollars, like the $20 bill you have in your wallet, are Federal Reserve Notes by definition they are credits on the books of the Federal Reserve. The Federal Reserve issues US dollars.
'Yankee Bonds', denominated in US dollars, can be issued by foreign entities, and, depending on the issuing entity and nature of the debt instrument, can be a relatively risk free as US Treasury Debt.
The interest rate of a bond is generally set by the issuer, but the yield is determined by the market price of the issue, which is set by the market.
2
You can prove all sorts of things if you only see the time interval that supports your point.
Using the author's own graph, estimates were usually too low in the 1980s, but too high in the 1990s and 2000s.
But, by ignoring data from before 1990, the author claims that the estimates are "consistently" too high. This is clearly not true, if you take the time to look at the graph. Include the 1960s and 1970s, and it becomes clear that the author has utterly no basis for claiming the "consistent" bias that is the core of his argument.
Using the author's own graph, estimates were usually too low in the 1980s, but too high in the 1990s and 2000s.
But, by ignoring data from before 1990, the author claims that the estimates are "consistently" too high. This is clearly not true, if you take the time to look at the graph. Include the 1960s and 1970s, and it becomes clear that the author has utterly no basis for claiming the "consistent" bias that is the core of his argument.
2
Pre 1990 recessions were quite different. They were brought on by the Fed to tame out of control inflation not by private sector over reach. The recessions now demand a much different response than previously so looking at rates from the 1960s really misses the entire point.
This misses the fact that the US federal gov't is suis generis. It borrows, and pays interest in, a fiat currency that it creates.
The US federal government is not like a household. It's job is to maximize our nation's economic output. That means creating money and jobs when productive capacities are slack, and destroying money and jobs when demand for our productive capacities is being bid up.
The lesson here is to IGNORE what the federal gov't is doing on these issues. As long as the public policy is responsible about creating/destroying money and jobs when appropriate, nit-piking over the deficit, debt and interest rates is like fighting over the amount of sand on a beach from one season to the next.
The US federal government is not like a household. It's job is to maximize our nation's economic output. That means creating money and jobs when productive capacities are slack, and destroying money and jobs when demand for our productive capacities is being bid up.
The lesson here is to IGNORE what the federal gov't is doing on these issues. As long as the public policy is responsible about creating/destroying money and jobs when appropriate, nit-piking over the deficit, debt and interest rates is like fighting over the amount of sand on a beach from one season to the next.
8
Presuming the $2 Trillion$-plus in ' stranded ' overseas corporate profits are invested in high-grade securities as required under most corporate charters, provision should be made in interest rate models for what happens to gov't. rates when that debt is dumped, as would likely happen with any Congressional re-work of corporate taxes.
As a window, we wonder what the effect on estimated rates were during the last ' repatriation ' in 2004:
http://www.nytimes.com/2009/06/05/business/05norris.html
a folly which corporations egregiously violated the terms of.
btw - we've always thought HRH's comment in 2008 regarding " no one seeing it coming " was very tongue-in-cheek; we're pretty sure she's wise enough to have people briefing her on Dr. Krugman's insights. Sometimes the dry British sense of humor can go right over one's head :)
As a window, we wonder what the effect on estimated rates were during the last ' repatriation ' in 2004:
http://www.nytimes.com/2009/06/05/business/05norris.html
a folly which corporations egregiously violated the terms of.
btw - we've always thought HRH's comment in 2008 regarding " no one seeing it coming " was very tongue-in-cheek; we're pretty sure she's wise enough to have people briefing her on Dr. Krugman's insights. Sometimes the dry British sense of humor can go right over one's head :)
5
The author missed a significant contributor to economists' systemic failures to predict the course of interest rates, or, indeed, anything else: politics. Despite a few outliers, economists, as a group, are politically biased toward the right. Studies of college economics majors show that they become more conservative between their freshman years and graduation. This appears to be unique to economics majors; mathematicians, physicists, historians, engineers, etc... either move left or maintain their original political positions over the course of their education. Economics, despite what economists would dearly love us all to believe, is not a predictive science. All too often, it is ideology hiding behind a lot of math.
11
That's not an accurate representation at all about what's taught or about economists. Yes, there are what I call the disassociated or autistic economists, some who write in these pages occasionally, but the things they say here or elsewhere that completely ignore how people actually respond and behave, or any sense of welfare, would be laughed out of any respected economics symposium or grad school - even here, they are roundly torn apart.
As for what gets taught, that depends to some extent on the school - PK has referred to salt water vs. fresh water economists - and the time period - Samuelson's textbook (neo-Keynesian) was the bible when I was an undergrad, whereas when I was in grad school, it was about cutting edge and decidedly not neo-Keynesian - but in general, contributions from all corners are recognized - 19th century, Keynes, Austrians, monetarists etc., and even Marx - without embracing an entire ideology. In grad school in particular, while most of my cohort tended to lean a little left, their thinking was constrained by evidence and data rather than ideology. Case in point: the most conservative of my grad school cohort wanted to make extreme value judgement statements in his dissertation, but had to revert to "the middle" because he could not support his desired conclusions with either theory or empirical evidence. Overall, I'd say most of my fellow students, and even economists I've known, were not particularly political/ideological.
As for what gets taught, that depends to some extent on the school - PK has referred to salt water vs. fresh water economists - and the time period - Samuelson's textbook (neo-Keynesian) was the bible when I was an undergrad, whereas when I was in grad school, it was about cutting edge and decidedly not neo-Keynesian - but in general, contributions from all corners are recognized - 19th century, Keynes, Austrians, monetarists etc., and even Marx - without embracing an entire ideology. In grad school in particular, while most of my cohort tended to lean a little left, their thinking was constrained by evidence and data rather than ideology. Case in point: the most conservative of my grad school cohort wanted to make extreme value judgement statements in his dissertation, but had to revert to "the middle" because he could not support his desired conclusions with either theory or empirical evidence. Overall, I'd say most of my fellow students, and even economists I've known, were not particularly political/ideological.
3
Mr Bernstein seems to discount that a bubble in bonds has occurred. Wasn't that the same mistake that Greenspan cited in his famous 'flaw' remarks, that by his thinking the market always produces the correct price of everything?
Secondly, markets in fact more often than not punish the consensus view - explained by complacency, groupthink and the in this case the fees professionals make by holding or trading bonds vs. cash.
Locking in money at 2% for ten years only makes sense if you are convinced the general price level will fall by at least that much every year. Good luck with that one.
Secondly, markets in fact more often than not punish the consensus view - explained by complacency, groupthink and the in this case the fees professionals make by holding or trading bonds vs. cash.
Locking in money at 2% for ten years only makes sense if you are convinced the general price level will fall by at least that much every year. Good luck with that one.
A bubble implies that an unexpected external event may set off a rush for the exits. But where exactly would everyone go? Into stocks? Gold? Cash?
Many long-term players are not in a position to leave. Insurance companies, and other long-term players, must hold long-term bonds to match their liabilities.
Still, it wouldn't take much to send the 10-year T-bond up to 4%.
Many long-term players are not in a position to leave. Insurance companies, and other long-term players, must hold long-term bonds to match their liabilities.
Still, it wouldn't take much to send the 10-year T-bond up to 4%.
For the better part of two centuries after the penning of "The Wealth of Nations" the interest rate on gilts and similar debts hovered very close to 3%. A combination of rock-hard money (gold) and the subsequent locked-in deflation or at best low-flation meant that money could only obtain a rate similar to average economic growth.
As the liquidity of debt increases it comes to look more and more like deposits in interest bearing checking accounts. If markets make it possible to liquify bonds and even mortgages at will then debt is, in fact money.
As our experience with fiat money becomes more familiar and fiat money is accepted by more and more of the holders of money as dependable (hard) a return to the true historic mean is ever more probable.
What we have gone through in the last 50 years is an arc of response to the final death of commodity backed currency. That it all begin in the years after Nixon made the dollar totally fiat with significant inflation and high risk premiums on gilt edged debt should be no surprise. That as a new generation arose who do not really remember anything else but fiat currency and high liquidity the interest on stable government debt would revert to the mean from the 19th century should be no surprise at all.
As the liquidity of debt increases it comes to look more and more like deposits in interest bearing checking accounts. If markets make it possible to liquify bonds and even mortgages at will then debt is, in fact money.
As our experience with fiat money becomes more familiar and fiat money is accepted by more and more of the holders of money as dependable (hard) a return to the true historic mean is ever more probable.
What we have gone through in the last 50 years is an arc of response to the final death of commodity backed currency. That it all begin in the years after Nixon made the dollar totally fiat with significant inflation and high risk premiums on gilt edged debt should be no surprise. That as a new generation arose who do not really remember anything else but fiat currency and high liquidity the interest on stable government debt would revert to the mean from the 19th century should be no surprise at all.
3
Your description of fiat money is reminiscent of 'The Emperor who wore no Clothes'. What you refer to is the superpower status of the US and its hold - at least until now - on the world order. The same fiat system exists all over the world - and virtually every currency is melting. The same rules apply. The US gets away with it because of size and groupthink, as mentioned above.
The day is approaching when the US will be as accountable as any other country is in justifying the true value of our currency unit.
The day is approaching when the US will be as accountable as any other country is in justifying the true value of our currency unit.
2
If banks do not depend on deposits and do not make loans are they still banks? Shouldn't this shift to an all fiat currency come with a shift in regulation- are they even banks anymore?
It is my understanding that Nixon closed the gold window because too many nations were redeeming their dollars for gold. That nations around the world were concerned that the U.S. was printing more dollars than it had gold to back due to escalating costs of the Vietnam war.
In that same vein doesn't an all fiat currency lead to unending wars? If there is no limit to debt a government can take on will diplomacy take a back to seat to military engagement? I can't help but think that some people do benefit financially from war- either with munitions or rebuilding afterwards.
Tell me please who is the largest beneficiary of an all fiat system. Is it the common man or the government and those in charge of the monetary system?
It is my understanding that Nixon closed the gold window because too many nations were redeeming their dollars for gold. That nations around the world were concerned that the U.S. was printing more dollars than it had gold to back due to escalating costs of the Vietnam war.
In that same vein doesn't an all fiat currency lead to unending wars? If there is no limit to debt a government can take on will diplomacy take a back to seat to military engagement? I can't help but think that some people do benefit financially from war- either with munitions or rebuilding afterwards.
Tell me please who is the largest beneficiary of an all fiat system. Is it the common man or the government and those in charge of the monetary system?
4
@DavidGunter - the 'true value of our currency unit' will always and only be driven by the productive output of our economy. It doesn't matter how much currency it takes to coax the most output out of our economy; the point is to coax out the max.
Comparisons to nations who produce little and create currency just to reward a corrupt oligarchy are useless when we're talking about creating currency to coax more production out of an idle but awesome economy like the USA.
Comparisons to nations who produce little and create currency just to reward a corrupt oligarchy are useless when we're talking about creating currency to coax more production out of an idle but awesome economy like the USA.
3
From the article regarding the 08' crash...
“Why did no one see it coming?
Lots of people did and they were ridiculed. There is another crash coming and I will risk the ridicule. My assessment is based on the following...
There were our trends leading up to the Great Depression.
1. The rich got richer
2. Investment shifted to speculation
3. Soaring stock market credit
4. Lagging business investment
Let's evaluate where we are today regarding the list. We definitely have number 1 in place thanks to both the government and the Federal Reserve. Second on the list has been accomplished thanks to Clinton's removal of the regulation keeping commercial and investment banks separate. Number 3 is covered with the help of the Federal Reserve's low interest rate. Finally we have number 4 and where are we on that? Well- businesses have been busy buying back their own stock due to the Federal Reserves generous QE program and zero interest rates. Buying back stock is not the same as putting money back into the operation. Why would companies buy back stock? Would it help to lift stock prices- yes.
Lots of people see the next crash coming. Lots of people understand that the government and the Federal Reserve (a private bank) have helped set the conditions for this to occur. Neither group will be held accountable as they feign surprise at the outcome of their actions.
“Why did no one see it coming?
Lots of people did and they were ridiculed. There is another crash coming and I will risk the ridicule. My assessment is based on the following...
There were our trends leading up to the Great Depression.
1. The rich got richer
2. Investment shifted to speculation
3. Soaring stock market credit
4. Lagging business investment
Let's evaluate where we are today regarding the list. We definitely have number 1 in place thanks to both the government and the Federal Reserve. Second on the list has been accomplished thanks to Clinton's removal of the regulation keeping commercial and investment banks separate. Number 3 is covered with the help of the Federal Reserve's low interest rate. Finally we have number 4 and where are we on that? Well- businesses have been busy buying back their own stock due to the Federal Reserves generous QE program and zero interest rates. Buying back stock is not the same as putting money back into the operation. Why would companies buy back stock? Would it help to lift stock prices- yes.
Lots of people see the next crash coming. Lots of people understand that the government and the Federal Reserve (a private bank) have helped set the conditions for this to occur. Neither group will be held accountable as they feign surprise at the outcome of their actions.
1
Tell you what, you sell short and I'll stay long and we'll see who still has a shirt come 2020.
Will there be another recession? Sure, there always is.
Will the market experience significant corrections? You bet but the trick as with all casino scenarios is to guess when.
Your 'four factors' are just another straw man argument. You select four things that are similar between the end of the 1920s and the current era, proclaim them the same and announce that you are a genius. It doesn't work that way.
Besides, as recent articles in this very series indicate not all your factors are currently in place.
Will there be another recession? Sure, there always is.
Will the market experience significant corrections? You bet but the trick as with all casino scenarios is to guess when.
Your 'four factors' are just another straw man argument. You select four things that are similar between the end of the 1920s and the current era, proclaim them the same and announce that you are a genius. It doesn't work that way.
Besides, as recent articles in this very series indicate not all your factors are currently in place.
13
Mr. O'Neil you should note that I said lots of people see the next crash coming. When lots of people see something coming down the pike it hardly reflects genius.
The point of the comment was to illustrate how government and the Federal Reserve have managed to screw the system up. The response to the 08' crash remedied nothing and imbedded policies that aggravate conditions that do not add up to economic health for the majority of the country.
You may time it right and escape unscathed from the downturn but many won't. Many of those people believe government is looking out for them which is far from the truth. It is obvious that the financial industry will not accept limitations from anyone when Congress allows Citibank to write legislation and the already weak Dodd-Frank Act is gutted even further.
Nowhere in my comment did I announce I was a genius- that was your attempt to discredit my thoughts on the current situation. I will accept the ridicule but will not apologize for doubting the health of the market. Not all of us agree with previous articles presented in "The Upshot."
The point of the comment was to illustrate how government and the Federal Reserve have managed to screw the system up. The response to the 08' crash remedied nothing and imbedded policies that aggravate conditions that do not add up to economic health for the majority of the country.
You may time it right and escape unscathed from the downturn but many won't. Many of those people believe government is looking out for them which is far from the truth. It is obvious that the financial industry will not accept limitations from anyone when Congress allows Citibank to write legislation and the already weak Dodd-Frank Act is gutted even further.
Nowhere in my comment did I announce I was a genius- that was your attempt to discredit my thoughts on the current situation. I will accept the ridicule but will not apologize for doubting the health of the market. Not all of us agree with previous articles presented in "The Upshot."
3
Irving Fischer (1920s) also believed the market was on a permanent high until it wasn't. More recent- Alan Greenspan, the former Federal Reserve Chairman, said the market was in for a large correction and gold was better than any fiat including the U.S. dollar. He made this latter remark while speaking to the Council on Foreign Relations.
Perhaps it is my age but I do not have the time to climb the stairs accruing gains only to take the elevator shaft to the bottom again. Baby boomers have got to be tired of seeing their investments rise over time only to see them slide quickly-2000 and 2008.
Once baby boomers leave the market who will replace them? The following generations are mired in student loans, under employed and living with their parents. Boomers having their nest egg gutted in 08' are staying in the work force.
Maybe I am wrong but I thought markets were a forecast of future economic conditions. I just don't see as bright a future as you Mr. O'Neil.
Perhaps it is my age but I do not have the time to climb the stairs accruing gains only to take the elevator shaft to the bottom again. Baby boomers have got to be tired of seeing their investments rise over time only to see them slide quickly-2000 and 2008.
Once baby boomers leave the market who will replace them? The following generations are mired in student loans, under employed and living with their parents. Boomers having their nest egg gutted in 08' are staying in the work force.
Maybe I am wrong but I thought markets were a forecast of future economic conditions. I just don't see as bright a future as you Mr. O'Neil.
"The forecasts implied by so-called “forward rates” — rates bond traders can lock in today " I hate to break it to Jared Bernstein, but forward rates have zero predictive power and are based only on today's information- everything gets arbitraged out of the curve. Bernstein should know this. Aside from accounting and regulatory requirements, "forward rates" are as predictive as futures. Ask the guys and gals who were trading Dec14/Dec15 WTI and Brent crude spreads last year- the backwardation in the curve predicted... "What? Dec14 crude went up over $10/bbl from Jan-Jun? It was supposed to go down (insert x-eyed grey faced emoticon here)". This is complete nonsense and should not be brought up in what is attempting to be intelligent conversation.
6
Nice.
What the graph says to me is that all these models are behaving pretty much like most knowledgeable people I know. There seems to be a long-run expectation that the yield on the ten-year bonds will be about 3.5% (the vertical scale isn't clear, I'm guessing at it) regardless of anything and everything. This isn't exactly regression to the mean but is clearly regression to something -- call it "regression to the reasonable." I had some friends in the economics department at Stanford in the 1960s who lost quite a bit of money predicting that this rate would go down. Eventually it did (as eventually the price of gold went above $35/oz) but it took decades.
It's easy to imagine how humans are biased to predict such "recessions" but not so easy to formulate a speculation about why models apparently exhibit the same tendency.
Economics still has a way to go as a science...
What the graph says to me is that all these models are behaving pretty much like most knowledgeable people I know. There seems to be a long-run expectation that the yield on the ten-year bonds will be about 3.5% (the vertical scale isn't clear, I'm guessing at it) regardless of anything and everything. This isn't exactly regression to the mean but is clearly regression to something -- call it "regression to the reasonable." I had some friends in the economics department at Stanford in the 1960s who lost quite a bit of money predicting that this rate would go down. Eventually it did (as eventually the price of gold went above $35/oz) but it took decades.
It's easy to imagine how humans are biased to predict such "recessions" but not so easy to formulate a speculation about why models apparently exhibit the same tendency.
Economics still has a way to go as a science...
It'll never get there!. It's way too much like a religious belief. Saying there is no god won't sway believers.
"Globalization and the spread of so-called financialization — the growth of interconnected financial markets in economies across the globe — have led to a significant increase in the sheer amount of capital and thus the stock of loanable funds. That increased supply has lowered the cost of capital in ways the models are missing." Most likely to avoid the issue, Bernstein omits another factor: rising inequality - wealthy people save rather than consume, and the more they make, the more they save. The world is awash with capital. This has two consequences: low interest rates (as indicated by Bernstein) and a preference by owners of capital for speculation and risk in search of higher returns. The latter consequence contributed to the 2008 financial crisis; indeed, some say "caused" the financial crisis; contrary to Bernstein, lots of folks saw the crisis coming, as the level of inequality in 2008 approached that of 1928. If these folks are correct, then another financial crisis may be on the horizon, as inequality once again approaches the level of 2008. Why don't forecasters consider inequality? For the same reason Bernstein didn't mention it.
5
As to not seeing why no one saw the crash coming, it's because economists do not live in the real world, but just a theoretical one they construct for themselves.
It's mystery why anyone takes any notice of them, except misinformation serves a purpose for influential people.