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An Austrian Answer to Iwog regarding predictions, if TLTR read the bold
2014 Oct 11, 1:21pm 5,897 views 2 comments
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indigenous
2014 Oct 11, 2:00pm
At 2008 a lot of Austrians were predicting inflation because of the money printing, since I did not follow Austrian economics then or ZH, I don't know but assume they got caught up in that. Mish however pointed out that we actually would have deflation because the credit market shrank at that time. He criticized Peter Schiff for missing this. When you think about it even 4 trillion in money printing is a small compared to the combined 12 trillion in money supply and 60 trillion in credit of 72 trillion IOW 6% of the combined money supply.
Other factors that seem to be apt to any predictions are fat tails such as:
The Fed itself with the Greenspan, Bernanke, Yellin put.
The Fed itself declaring their focus on stock prices and telling the investors they can in effect ignore ANY tail risk.
Oil prices between fracking and lower demand from China at $85 a barrel
The plummeting in demand from China and the demand from the Chinese people for a better standard living after decades at the wrong end of mercantilism.
The current account moving in a positive direction for the US for the first time in decades. Much of this from the ending of mercantilism and technology in fracking.
The biggest of all influences are demographics and the boomers moving into the 60+ age bracket which means they won't but stuff.
Austrian economics does predict that the US is in trouble because of a lack of investment in producer goods. In comparison China was replacing major equipment every year which no doubt contributed to their meteoric rise.
But even that cannot trump the business cycle, the fact that they printed money just like every other central bank and because of that created malinvestment. So they are going to have to correct big time. And if they don't do it well they will have a tiger by the tail in the name of 1.3 billion Chinese people who are rightfully pissed off, similiar to 300+ million here and for the same reason.
Another one is the BRICS which will take away the Feds ability to print with impunity.
Or that the stock market and the economy do not correlate, both however are influenced by the fact that people act base off their goals, since their acting is a confluence called reality it changes with lightening speed and strikes unpredictably.
As Henry Hazlitt said, paraphrasing, there is too much going on in the economy for any one person to know it all. Certainly I am not so obtuse as to think I do.
So reading the tea leaves of how this will shake out is best left to people who are better at it than ZH.
"Don't speak too soon
'Cause the wheel's still in spin
And there's no telling who
That's it's naming"
Bob Dylan
A panel discussion at the 2014 Mises University addressed the question of whether Austrian economics can improve financial predictions.
We first want to distinguish between a colloquial meaning of prediction — improving the accuracy of one’s expectations — and the more rigorous sense of actually knowing the future. Austrians emphasize that the belief that one actually knows the future can be very dangerous, especially when central planners start to think their statistics and charts constitute crystal balls.
On the other hand, Austrian economists certainly predict in the more colloquial sense of improving accuracy of expectations. Indeed, Austrian economists even look both ways before crossing the street.
A secondary discussion has focused on the prediction failures of particular financial commentators who try to use an Austrian approach. This is a valid point; anybody who predicts for a living deserves to have their record examined. But in the process we want to be careful to assign blame correctly; was the theory to blame, or did the practitioner either misuse theory or combine that theory with bad data.
So, first, we want to be specific about what economic theory itself can and cannot do. Critics seem to think theory should be a map, when theory itself is more like a compass: a compass that tells you where to go, not how to get there. Just as there are good and bad compasses, there are good and bad theories.
In the real world, prediction is a spectrum: we might predict the sun will rise tomorrow, that winter will be colder than summer, that money-creation leads to inflation. All of these predictions are subject to outside factors, therefore they all run on different probabilities and different magnitudes.
Reading astronomy alone won't tell you if winter will be mild. And it certainly won't tell you if a given day will be cold. Similarly, economic theory will not give you precise magnitudes nor will it give you precise timing. For that we need to supplement the theory with data. This proposition, that theory alone does not give you all the answers, is a part of "radical uncertainty" in Austrian economics, a concept admirably popularized by Nassim Taleb's best-seller The Black Swan.
To actually predict using an economic theory — any theory — you need data. A good theory will tell you what data you need. If you choose well, that data informs your magnitudes, and it's the magnitudes that give you your best timing.
To see why, consider walking backward on an eastbound train. The train is pointed east, and you walk west. Which direction is your body moving? Well, are you walking fast? Is the train moving slow? Newtonian physics or human anatomy will only get you part-way. Closer than Aristotelian physics and octopus anatomy, to be sure. But you'll need to supplement the theory with data. The theory is necessary but insufficient.
The question becomes, then, whether Austrian economics is better theory. Does it give better answers about fundamental trends. After that, no matter what theory got you there, you'll have to plunge into the data.
One of my favorite examples is the role of consumption in economic growth. Consumption is taken by most non-Austrian economists as a positive indicator of economic health. Like a doctor's thermometer, consumption tells you the economy is "healthy" and likely to grow. Non-Austrians make this prediction largely via correlations: higher consumption is correlated with future growth.
An Austrian, on the other hand, starts with logical causation. And, logically, when an extra resource is consumed that means it was not invested and it was not saved. After all, you can only do three things with a resource — consume it, invest it, or set it aside for the future. So raise consumption of resources and you necessarily lower either physical investment or you run down the stock of saved resources.
So an Austrian doesn't naïvely celebrate consumption. Rather, our theory tells us which data to use next. Was the extra consumption siphoned out of investment? Or was it siphoned out of savings?
If it came out of savings, then consumption may well grow tomorrow's GDP, albeit "stolen" from the future by running down saved resources. If, on the other hand, it came from investment, then the mainstreamers ..are completely wrong — siphoning from investment to consumption will have no impact on current growth and will actually harm future growth. Simply because investment makes stuff in the future, while consumption does not.
The point here is that data alone doesn't tell you the whole story, which is a core proposition of the Austrian approach. Instead, you need to start with good theory that tells you which data you need and where to look next. Guiding that process is the fundamental proposition of Austrian prediction, and to ask for more is to fundamentally misunderstand what theory can do. Just as Newton alone won't tell you who's walking west on a train, Austrian theory alone won't do all the work in investing.
http://mises.org/daily/6917/Can-Austrian-Theory-Help-Financial-Prediction