Paul Krugman Proves the Accuracy of My January Forecast

I have consistently said that Paul Krugman is clueless as far as economic theory is concerned, but that he is an economic data hound who understands what is in front of him. His speech today at the World Business Forum appears to prove my case, on what he can and can not do correctly as an economist. In his speech, he also, in the process, confirmed the accuracy of the forecast I made in January.

WSJ's Kelly Evans reports on Krugman's comments on the U.S. economy included the following:

1 - Based on GDP, “the recession is over, we’re back to a world of growth”

2 - But, “the jobs picture is continuing to deteriorate. The recession may be over, but the bad times are nowhere near over.”

3 - “This could be bad. Financial crises tend to produce prolonged hits to growth…and this is the mother of all synchronized financial crises so we almost certainly have a long, long slog before we’re fully recovered.”

Then, he turned to the topic of world trade. And the picture he painted was not a pretty one.

“When it comes to international trade, actually it’s not the Great Depression, it’s worse,” he said, presenting charts showing the decline in global trade activity falling much more steeply in the current downturn than during the Depression.

“The scale of the collapse of world trade has been so large that it has produced a degree of international linkage that surpasses what even the pessimists imagined,” he said. “World trade acted as a transmission mechanism,” spreading economic distress “even to those countries that had relatively healthy financial systems,” such as Germany.

“We really are one world economy in a way that has never been true before,” he said.

Krugman understands the facts but can't explain why it is occurring. I nailed what is now occurring in real time back in January, when I wrote:

Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009.

Find me another economist back in January that expected a recovery in GDP in the second half of 2009, everyone else was talking early 2010, at the earliest. Better yet, find me another economist that said there would be a recovery in GDP BUT that the real economy would be a mess.

Krugman could never pull that off, but now that it is here, he does know how to read the data in front of him.

The reason I was able to make the forecast in January was be cause I actually believe that money matters. The fact that I expected a screwy recovery was because I saw where the Fed was pumpimg tremendous amounts of money at that time---solely into the financial sector, indeed, for the most part into select insider banks. I knew it was enough to pump up GDP in a couple of quarters, but I also knew this new money was not circulating widely enough in the entire economy. Thus, my call for rebounding GDP but an anemic overall economy.

The one bit of my forecast where I was off on was unemployment. I expected unemployment to be lower, although I did note that unemployment is a lagging indicator. I was off here because I fully expected Bernanke to continue to print money. I never expected him to stop dead in his track, as he did in March. If Bernanke had continued printing money it would have started to drain employees from the unemployment lines--not enough to readjust the entire economy, but unemployment would have perked up in the money center areas, primarily New York followed by California and Chicago. But his halt in money printing never gave the financial sector enough time to start hiring again. So what we have is a GDP spike as a result of the money pumped into the Bush/Obama favored banks and that's pretty much it. (Maybe a little should be counted in the auto sector). Now, with the halt in money printing (M2 nsa), I find myself all by my lonesome, again. This time predicting a double dip--after I was one of the few to get the uptick right.

Krugman knows things are bad, and when the double dip is real obvious, I think he will be one of the first to confirm. I will await for Krugman to confirm the accuracy of my current forecast by late December/ early January. What will the double dip look like, almost all indicators will start to nosedive,again. It will not be pretty.