Tuesday, October 04, 2011

Consensus economists views versus my view

For a good summary of the current views of consensus economists see: http://www.reuters.com/article/2011/10/05/us-economy-outlook-idUSTRE7940M720111005

Why are theee consensus views wrong?

Because the models they use to understand what is going on and to make their forecasts do not take three things into account:

1. Deleveraging: we have had some decades where we have had the benefits of over-leverage, and we are now in a phase where we must deleverage. That will not take days or weeks or months, but at least a few years.

2. The current money wars: we have had some decades where currencies (excuding the Chinese Remnimbi or Yuan) appreciated and converged. We are now in a phase where every country, in response to the Chinese position as it has become increasingly damaging to other economies, are all in turn trying to weaken their currencies and keep them as low as possible. That is what explains at least a part of the logic for Quantitative Easing, and for the reluctance of European authorities to rescue Greece et all too quickly or definitively.

3. Asset overvaluation due to too much money sloshing around the world: asset values will have to come down, and a lot of paper money will have to be effectively destroyed, before asset prices diverge again to reflect the real risks involved in each class of them, and the different phases of boom and bust in which each class of assets is.

When I am convinced that the models of consensus economics take the above three factors into due account, I will be more inclined to trust them. Sphere: Related Content

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