About As Useful As A Fork In A Sugar Bowl

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A Follow Up To: The Biggest Scam In The History Of Mankind

See Also: ‘Hang Onto Your Hats’ Folks!

Excerpt from Dan Steinhart Managing Editor of The Casey Report

Humans tend to believe what they’re told by authority figures. Even in the face of contradictory evidence The Milgram Experiment taught us this in 1963. Posing as scientists, researchers instructed volunteers to inflict painful electric shocks on what they thought were other innocent volunteers, as a penalty for answering questions incorrectly. The shockers couldn’t see the people they were shocking, but could hear their reactions: terrible cries of pain, pounding on the wall, pleas to stop, and eventually, ominous silence.

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Of course, it was all a ruse, but the shockers didn’t know that. They thought they were effectively torturing the victims. Yet most shockers ignored the victims’ agonized pleas to stop, opting instead to obey the “scientist’s” commands to continue. Why? Because the ‘scientist’ was an expert. He was wearing a white lab coat, so he must know best.

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We treat economists similarly today, deferring to their expertise in economic matters, even when common sense suggests they are wrong. Paul Krugman says an alien invasion would cure our economic ills by forcing us to spend money to defend against their attack. If a stranger on the bus said that, you might direct him to the nearest mental facility. But Krugman? He has a framed MIT doctorate gracing his office wall, so he must know what he’s talking about.

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Cartoon by Andrew Peterson

With This In Mind, The Following is An Excerpt From:

Code Red: How to Protect Your Savings From the Coming Crisis

By John Mauldin & Jonathan Tepper

From Chapter 6: ‘Economists Are Clueless’

In November of 2008, as stock markets crashed around the world, the Queen of England visited the London School of Economics to open the New Academic Building. While she was there, she listened in on academic lectures. The Queen, who studiously avoids controversy and almost never lets people know what she’s thinking, finally asked a simple question about the financial crisis,

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How come nobody could foresee it?” No one could answer her.

If you suspected that mainstream economists are useless at the job of seeing a crisis in advance, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What’s worse is that they fail miserably even at understanding where the economy is today. In one of the broadest studies of whether economists could predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, “The record of failure to predict recessions is virtually unblemished.”… In plain English, economists don’t have a clue about the future.

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If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a fork in a sugar bowl. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a Code Red world, we trust the same bankers to know where the economy is, where it is going, and how to manage monetary policy.

Central banks say that they will know when the time is right to end Code Red policies and when to shrink the bloated monetary base. But how will they know, given their record at forecasting? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it didn’t even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon. Trusting central bankers now is a big bet that (1) they’ll know what to do and (2) they’ll know the right time to do it. Sadly, they generally don’t have a clue about what is going on.

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Unfortunately, the problem is not that economists are simply mediocre at what they do. The problem is that they’re really, really bad. And they’re so bad that their ineptitude cannot even be a matter of chance. As the statistician Nate Silver pointed out in his book The Signal and the Noise: Indeed, economists have for a long time been much too confident in their ability to predict the direction of the economy. If economists’ forecasts were as accurate as they claimed, we’d expect the actual value for GDP to fall within their prediction interval nine times out of ten, or all but about twice in eighteen years.

In fact, the actual value for GDP fell outside the economists’ prediction interval six times in eighteen years, or fully one-third of the time. Another study, which ran these numbers back to the beginning of the Survey of Professional Forecasters in 1968, found even worse results: the actual figure for GDP fell outside the prediction interval almost half the time. There is almost no chance that economists have simply been unlucky; they fundamentally overstate the reliability of their predictions.

So it gets worse. Economists are not only generally wrong, they’re extremely confident in their bad forecasts. If economists were merely wrong at betting on horse races, their failure would be harmlessly amusing…

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…But central bankers have the power to create money, change interest rates, and affect our lives in every way—and they don’t have a clue….

In his book Future Babble, Dan Gardner wrote that economists are treated with the reverence the ancient Greeks accorded the Oracle of Delphi. But unlike the vague pronouncements from Delphi, economists’ predictions can be checked against the future, and as Gardner says, “Anyone who does that will quickly conclude that economists make lousy soothsayers.”

(As an aside, we suspect that economists may be the modern-day functional equivalent of Tribal Shamans

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…Instead of peering at the intestines of sheep to forecast the future, we look at data through the lenses of models we create, built with all our inherent biases, and then confidently predict the future or try to guide government policy in one direction or another, generally along paths that fit the favor depending on whether we are telling our fellow tribe members and leaders and potential leaders what they want to hear. It may be that economics is more like religion and less like science than most of us want to admit.)…

Let’s remind ourselves what a recession is and how economists decide that one has started. A recession is a downturn in economic activity. Normally, a recession means unemployment goes up, GDP contracts, stock prices fall, and the economy weakens. The lofty body that decides when a recession has started or ended is the Business Cycle Dating Committee of the National Bureau of Economic Research. It is packed with eminent economists and other extremely smart people. Unfortunately, their pronouncements are completely unusable in real time. Their dating of recessions is authoritative and more or less accurate, but this exercise in hindsight comes together long after a recession has started or ended.

To give you an idea just how late recessions are officially called, let’s look at the past three. The NBER dated the 1990-91 recession as beginning in August 1990 and ending in March 1991. It announced these facts in April 1991, by which time the recession was already over and the economy was growing again. The NBER was no faster catching up with the recession that followed the dotcom bust. It wasn’t until June 2003 that the NBER pinpointed the 2001 recession—a full 28 months after the recession ended. The NBER didn’t date the recession that started in December 2007 until exactly one year later. By that time, Lehman had gone bust, and the world was engulfed in the biggest financial cataclysm since the Great Depression.

The Federal Reserve and private economists also missed the onset of the last three recessions—even after they had started. Let’s look quickly at each one. Starting with the 1990-91 recession, let’s see what the head of the Federal Reserve—the man who is charged with running American monetary policy—was saying at the time. That recession started in August 1990, but one month before it began Alan Greenspan said, “In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” The following month—the month the recession actually started—he continued on the same theme: “… those who argue that we are already in a recession I think are reasonably certain to be wrong.” He was just as clueless two months later in October 1990, when he persisted, “… the economy has not yet slipped into recession.” It was only near the end of the recession that Greenspan came around to accepting and acknowledging that it had begun.

The Federal Reserve did no better in the dotcom bust. Let’s look at the facts. The recession started in March 2001. The tech heavy NASDAQ Index had already fallen 50% in a full-scale bust. Even so, Chairman Greenspan declared before the Economic Club of New York on May 24, 2001, “Moreover, with all our concerns about the next several quarters, there is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth rate in productivity to a level significantly above that of the two decades preceding 1995.”

Charles Morris, a retired banker and financial writer, looked at a decade’s worth of forecasts by the geniuses at the White House’s Council of Economic Advisors. In 2000, the council raised their growth estimates just in time for the dot-com bust and the recession of 2001-02. In a survey conducted in March 2001, 95% of American economists said there would not be a recession. The recession had already started that March, and the signs of contraction were evident. Industrial production had already been contracting for five months.

You would have thought that their failure to forecast two recessions in a row might have sharpened the wits of the Federal Reserve, the Council of Economic Advisers, and private economists. Maybe they would have tried to improve their methods or figured out why they had failed so miserably. You would be wrong. Because along came the Great Recession, and—once again—they completely missed the boat.

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Let’s look at what the Fed was doing as the world was about to go up in flames in 2008. Recently, complete minutes of the Fed’s October 2007 meeting were released. Keep in mind that the recession started two months later, in December 2007. The minutes make for depressing reading. The word recession does not appear once in the entire transcript…

Unfortunately, private-sector economists didn’t do much better. With very few exceptions, they failed to foresee the financial and economic meltdown of 2008. Economists polled in the Survey of Professional Forecasters also failed to see a recession developing. They forecasted a slightly below-average rate of 2.4 percent for 2008, and they thought there was almost no chance of a recession as severe as the one that actually unfolded. In December 2007, a Businessweek survey showed that every single one of 54 economists predicted the U.S. economy would avoid a recession in 2008. The experts were unanimous that unemployment wouldn’t be a problem, leading to the consensus conclusion that 2008 would be a good year…

… GDP actually shrank by 3.3% once the financial crisis hit. What may be worse is that the economists were extremely confident in their bad prediction. They assigned only a 3% chance to the economy’s shrinking by any margin over the whole of 2008. And they gave it only about a 1-in-500 chance of shrinking by 2 percent, as it did.

It is one thing to be wrong. It is quite another to be consistently and confidently and egregiously wrong. As the global financial meltdown unfolded, Chairman Bernanke, too, continued to believe that the United States would avoid a recession. Mind you, the recession had started in December 2007, yet in January 2008 Bernanke told the press, “The Federal Reserve is not currently forecasting a recession.” Even after banks like Bear Stearns needed to be rescued, Bernanke continued seeing rainbows and candy-colored elves ahead for the U.S. economy. He declared on June 9, 2008, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” At that stage, the economy had already been in a recession for the past six months!…

So, we have cataloged the incredible failures of economists to predict the future or even to understand the present. Now, with their record in mind, think of the vast powers Fed economists have to print money and move interest rates. When you contemplate the consummate skill that would actually be required to manage Code Red policies, you realize they’re really just flying blind…

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