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We have explained this fact with some latitude in our lesson Austrian Economics In Theory but it is something worth repeating. It is impossible to forecast any economic parameter with sufficient accuracy to be of any use to anybody in the long term or in detecting changes. The economy cannot be forecasted.

Many people get confused and impressed by the jargon many economists use when explaining why tomorrow interest rates will raise, and the following day why they did not. There is always a complex set of variables and plots, assumptions and definitions, trends and exceptions that can justify anything. And they do.

Economists are only capable of forecasting with some accuracy a trend, when the trend continues! In other words, if interest rates are going up, we can forecast that they will go up. They will go up for as long as the trend continues. This is a classic cyclic argument that goes nowhere and proves nothing. Yet, this is the only thing that economists are good at doing.

There is no magic super computer or Nobel prize winning theory or a super genius economist stashed somewhere in an ivory tower with the keys to economic behavior.

You don’t believe us. That’s OK. We don’t expect to be believed. Do your homework. Go back and identify every economic “downturn” (recession) in your country and see if any economist anywhere in the world managed to forecast their beginning consistently and with accuracy. Let’s say a year before it happened +/- one month. Don’t bother. They do not exist. Not fair enough? Six months perhaps? No. One month? No.

As a matter of fact, the precise month when a recession begins is identified many months after the fact, with great trepidation, many conditions, great debate and little agreement.

This is so, because the entire economy depends on the subjective decision of all the participants. Each one of us is making personal decisions based on personal values and conditions all the time. These decisions simply cannot be forecasted and this is good. Just imagine what would happen if the economy could be forecasted. Those in the know would become our overlords through economic tyranny. Those outside the know, would become their economic slaves.

It is precisely this impossibility to forecast that makes the economy a fair playing field. Everybody has the same opportunity to get it wrong or right. It depends of each one of use. There is no secret or mystery.

Let us put it this way. Every time you come across somebody selling the “secret economic knowledge” that will make you millionaire, ask yourself this. Why is this person selling this knowledge for a few thousands instead of using it and become incredibly rich? Simple. It does not work. It is information vaporware. But not to worry, there is a sucker born every minute!

As we said above, it is easy to forecast the near future as long as there is a trend. But a trend is trivial to forecast. You don’t even need a theory or a computer. You can do it in your head! The real trick is to accurately forecast the mid and far future; the point at which there is no information about the current trend. The point at which changes happen. That is most certainly impossible to do.

And if the economy cannot be forecasted, a question pops to mind: how does a central bank knows what interest rate should there be? Simple, they use computers and models which are, as you guessed it, useless. Yes. We are controlled by people that have no clue whatsoever what they are doing. And this is when things are working out more or less ok. But what happens when there is a crisis? Then all bets are off. Trading is halted. Central banks panic and they take measures that are so, so out of anything remotely reasonable that the consequences cannot be other than massive and devastating. Maybe not today, but eventually. It is inevitable.

Yes, our entire economy is “managed” by people looking at technologically advanced crystal balls called computers. Instead of reading tea leaves, they read models. Instead of mumbling incomprehensible incantations, they mumble incomprehensible techno jargon.

At its most basic, the economy is not complicated. Economists make it complicated because they try to make it compliant to statistical parameters and mathematical models. But at the end of the day, the theoretical economy they create must reflect the real economy, the one driven by everyday people. If it does not, it is worthless… and now you know why it so is.

If the economy cannot be forecasted, this necessarily means that politicians are also guessing or worse! Decisions that affect our lives are made by people that have higher chances of getting it wrong than flipping a coin. This is another fact.

How is this possible? Simple. Governments spend. Any expenditure decreases economic activity. Politicians simply determine how much expenditure will take place. Therefore, it is almost a statistical certainty that any decision they make will have negative impacts on the economy as a whole.

The economy cannot be forecasted. This is a fact. Next time you hear somebody, some politician or economist talking about how to “fix” it, ask them when was the last time they accurately forecasted any downturn? Ask them to provide proof of such a forecast… and then watch them avoiding the answer in shame.

The economy cannot be forecasted. Best we can do is let it be. It is an optimized system. Any tinkering only makes it less efficient. You can choose to follow their lead or lead in a different direction. It is your decision, choose wisely.

Note: please see the Glossary if you are unfamiliar with certain words.

 

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