Thursday, January 8, 2009

The Case for Optimism (Sort of)

John Cassidy at correctly outlines what is wrong with most of those forecasting years of recession for the economy:
I wouldn’t say that I’m a heady optimist, but I think there is a danger of repeating the mistake that many of us made during the boom: extrapolating current trends to make decisions about the future, failing to take into account how rapidly economic circumstances can change. There’s a risk that we may again overshoot the mark: As the economy goes down, we could be overemphasizing the negative just as we exaggerated the positive on the way up.
The most dangerous thing you can do in economics is simply extrapolate, and that is what most economists do. Cassidy's observation is right on, outside of my own view that the economy will turn around much quicker than most expect, he is the only one that seems to understand the extrapolation fallacy.

Cassidy then goes on to create a laundry list of reasons why the economy could turnaround faster than most expect. Most of his reasons belong, well, in the laundry. But he also hits on the winner and main reason this recession will be over in months instead of years:
... we have the Federal Reserve...injecting money into the financial system at a rate never seen before.
My (Sort Of) addendum to his original title to his article, The Case for Optimism, is because the economy will "recover" sooner than most expect, but ultimately the result will be an enormous growth in the inflation rate, and that is nothing to be optimistic about at all.

1 comment:

  1. Well good, since you and I normally enthusiastically agree with each other, I'm glad we finally have a way to separate the man from the boy. I think the economy over the next 3 years is going to be absolutely awful. The government has literally taken over large chunks of the financial sector, and now the Fed is engaging in discretionary injections of hundreds of billions of dollars to specific firms. The gross federal debt already went up by over $1 trillion in 2008, and we've got an incoming president who openly called for wealth redistribution and just nominated an explicit socialist to oversee the nation's energy markets.

    And you're saying what again? "Sure, but Bernanke is flooding the system with a bunch of paper money." :)